-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Pj8yREj0WywHCVTJhwtfH3+/3l2NLsNQ0N9kjfRAeH3jDRe0BjYGkFtscv3nSEIZ du8GN1c+KYpFdiBVp4Ex3w== 0000882184-98-000063.txt : 19981211 0000882184-98-000063.hdr.sgml : 19981211 ACCESSION NUMBER: 0000882184-98-000063 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981210 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HORTON D R INC /DE/ CENTRAL INDEX KEY: 0000882184 STANDARD INDUSTRIAL CLASSIFICATION: OPERATIVE BUILDERS [1531] IRS NUMBER: 752386963 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-14122 FILM NUMBER: 98767759 BUSINESS ADDRESS: STREET 1: 1901 ASCENSION BLVD STREET 2: STE 100 CITY: ARLINGTON STATE: TX ZIP: 76006 BUSINESS PHONE: 8178568200 MAIL ADDRESS: STREET 1: 1901 ASCENSION BLVD STREET 2: SUITE 100 CITY: ARLINGTON STATE: TX ZIP: 76006 10-K 1 FORM 10-K FOR D.R. HORTON, INC. OVER $2 BILLION IN REVENUES Dear Stockholders: New records in revenues and earnings allowed the Company to achieve its 21st consecutive year of growth and profitability, and made D.R. Horton the 3rd largest homebuilder in the United States. 1998 WAS AN EXCEPTIONAL YEAR IN WHICH WE: o Merged with Continental Homes Holding Corp. and acquired three companies: C. Richard Dobson Builders, Inc. on the southeastern seaboard (February 1998) Mareli Development and Construction in Louisville (May 1998) RMP Properties, Inc. in Portland (June 1998). o Restructured our homebuilding bank credit facilities to aggregate $825 million with terms up to 4 years at reduced borrowing rates. Further, we entered into an additional $200 million in interest rate swap agreements to fix the interest rate on a portion of this debt. o Increased our quarterly cash dividend by 12 1/2%. o Expanded mortgage services to our homebuyers, through our wholly-owned subsidiary, CH Mortgage, Ltd. We established a separate $75 million warehouse bank credit line to finance this activity. o Commenced startup operations in Sacramento and initiated title agency operations in Miami and Minneapolis. o Provided stockholders with a 22% return on beginning stockholders' equity. ADDITIONALLY, IN 1998 WE INCREASED: o Pre-tax income 47% to $159 million o Revenues 38% to $2.2 billion (13,944 homes) o New sales orders 59% to $2.5 billion (15,952 homes) o Year end sales backlog 73% to $1.1 billion (6,341 homes) o Stockholders' equity 28% to $549 million o Total assets 34% to $1.7 billion ANNUAL AWARDS Each year, D.R. Horton formally recognizes outstanding achievements through its individual and divisional awards. We congratulate our 1998 recipients of these awards, who were: o The Los Angeles Division managed by Gerald Nordeman, was named "Division of the Year" by the managers of the Company's other divisions. o Cesi Pagano, of our Los Angeles Division, led the Company by selling the highest dollar volume of homes and is our "Sales Person of the Year". o Don Rampy, of our Continental Denver Division, is our "Construction Person of the Year" for supervising construction of the most homes in 1998. Since September 30 (year end) we: Converted the remaining outstanding convertible notes to common stock increasing our stockholders' equity by $58 million, to more than $600 million. Announced the promotions of Donald J. Tomnitz to Vice Chairman and Chief Executive Officer and Richard Beckwitt to President. Approved programs to repurchase up to $100 million each of common stock and senior debt securities, if market conditions warrant. 1999 AND BEYOND More important than our past, we have set the stage for continued success in 1999 and beyond. We look forward to a highly successful year ahead and anticipate D.R. Horton will enjoy its 22nd year of growth and profitability. Some of our goals for 2000 are to exceed $4 billion in revenues, and we plan to continue to be one of the most profitable companies in the homebuilding industry. We invite you to follow our progress and become more familiar with our Company by accessing our website at http://www.DRHORTON.com. Our rapid growth requires that we attract, develop and retain very talented personnel. Effective January 1, 1999, we will enhance our overall Company-wide employee benefits to reward our existing employees and to help attract future talent to the Company. We commend all our employees for their assistance in making 1998 an exceptional year and ask their help in making 1999 even better. We also extend thanks to our shareholders and customers for their continued investment and interest in D.R. Horton, Inc. Our history demonstrates not only our ability to grow by initiating operations in new markets, but also our success in acquiring companies that make immediate contributions to our earnings. We continuously explore acquisition candidates and new markets and plan to enter new markets annually. Additionally, we see significant opportunities to expand our mortgage services to a larger number of our homebuyers. The continuous growth of our Company through geographic expansion is unmatched by anyone in the industry. /s/ DONALD R. HORTON Donald R. Horton Chairman of the Board ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------- Form 10-K (Mark One) [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended September 30, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File number 1-14122 ---------- D.R. HORTON, INC. (Exact name of registrant as specified in its charter) Delaware 75-2386963 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1901 Ascension Blvd, Suite 100 76006 Arlington, Texas (Zip Code) (Address of principal executive offices) (817) 856-8200 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- Common Stock, par value $.01 per share The New York Stock Exchange 8 3/8% Senior Notes due 2004 The New York Stock Exchange 10 % Senior Notes due 2006 The New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of November 30, 1998, there were 61,410,148 shares of Common Stock, par value $.01 per share, issued and outstanding, and the aggregate market value of these shares held by non-affiliates of the registrant was approximately $894,285,000. Solely for purposes of this calculation, all directors and executive officers were excluded as affiliates of the registrant. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on January 15, 1999, are incorporated herein by reference in Part III. ================================================================================ PART I ITEM 1. BUSINESS D.R. Horton, Inc. (the "Company" or "Horton") constructs and sells single-family homes in metropolitan areas of the Mid-Atlantic, Midwest, Southeast, Southwest, and West regions of the United States. We offer high-quality homes, designed principally for first time and move up homebuyers. Our homes generally range in size from 1,000 to 5,000 square feet and range in price from $80,000 to $600,000. For the year ended September 30, 1998, we closed homes with an average sales price approximating $153,300. Although, we have historically positioned ourselves as a custom builder, we have recently acquired two volume building companies which will enable us to compete across a broader product offering. On April 20, 1998, we acquired Continental Homes Holding Corp. ("Continental"), a geographically diversified homebuilder, through the merger of Continental into Horton (the "Merger"). In the Merger, Horton issued approximately 15.5 million shares of its common stock, and Continental's outstanding convertible securities and options became convertible into or exercisable for an additional 8.2 million shares. The Merger was accounted for as a pooling of interests. Accordingly, all information for prior periods has been restated to show the combined results of Horton and Continental. We are one of the most geographically diversified homebuilders in the United States, with operating divisions in 23 states and 41 markets as of September 30, 1998. The markets we operate in include: Albuquerque, Atlanta, Austin, Baltimore, Birmingham, Charleston, Charlotte, Chicago, Cincinnati, Dallas/Fort Worth, Denver, Greensboro, Greenville, Hilton Head, Houston, Jacksonville, Kansas City, Killeen, Las Vegas, Los Angeles, Louisville, Minneapolis/St. Paul, Miami, Myrtle Beach, Nashville, New Jersey, Newport News, Orlando, Pensacola, Phoenix, Portland, Raleigh/Durham, Richmond, Sacramento, Salt Lake City, San Antonio, San Diego, St. Louis, Tucson, Suburban Washington, D.C. and Wilmington. We build homes under the following names: D.R. Horton, Joe Miller, Arappco, Regency, Trimark, Torrey, SGS, Dobson, Continental, Milburn, RMP and Mareli. We were incorporated in Delaware on July 1, 1991, to acquire all of the assets and businesses of 25 predecessor companies, which were residential home construction and development companies owned or controlled by Donald R. Horton. Our principal executive offices are located at 1901 Ascension Blvd., Suite 100, Arlington, Texas 76006, and its telephone number is (817) 856-8200. 1 Operating Strategy We believe that the following operating strategies have enabled us to achieve consistent growth and profitability: Geographic Diversification From 1978 to late 1987, excluding Continental locations, our homebuilding activities were conducted in the Dallas/Fort Worth area. We then instituted a policy of diversifying geographically, entering the following markets in the years shown: Year Entered Markets ------------ ------- 1987.............. Phoenix 1988.............. Atlanta, Orlando 1989.............. Charlotte 1990.............. Houston 1991.............. Suburban Washington, D.C. 1992.............. Chicago, Cincinnati, Raleigh/Durham, South Florida 1993.............. Austin, Los Angeles, Salt Lake City, San Diego 1994.............. Minneapolis / St. Paul, Kansas City, Las Vegas, San Antonio 1995.............. Birmingham, Denver, Greensboro, St. Louis 1996.............. Albuquerque, Pensacola 1997.............. Greenville, Nashville, New Jersey, Tucson 1998.............. Baltimore, Charleston, Hilton Head, Jacksonville, Killeen, Louisville, Myrtle Beach, Newport News, Portland, Richmond, Sacramento, Wilmington We continually monitor the sales and margins achieved in each of the subdivisions in which we operate as part of our evaluation of the use of our capital. While we believe there are significant growth opportunities in our existing markets, we intend to continue our policy of diversification by seeking to enter new markets. We believe our diversification strategy mitigates the effects of local and regional economic cycles and enhances our growth potential. Typically, we will not invest material amounts in real estate, including raw land, developed lots, models and speculative homes, or overhead in start-up operations in new markets until such markets demonstrate significant growth potential and acceptance of our products. Acquisitions As an integral component of our operational strategy of continued expansion, we continually evaluate opportunities for strategic acquisitions. We believe that expanding our operations through the acquisition of existing homebuilding companies affords us several benefits not found in start-up operations. Such benefits include: o Established land positions and inventories o Existing relationships with land owners, developers, subcontractors and suppliers o Brand name recognition o Proven product acceptance by homebuyers in the market In evaluating potential acquisition candidates, we seek homebuilding companies that have an excellent reputation, a track record of profitability and a strong management team with an entrepreneurial orientation. We limit the risks associated with acquiring a going concern by conducting extensive operational, financial and legal due diligence on each acquisition and by only acquiring homebuilding companies that we believe will have an immediate positive impact on our earnings. 2 During the last five fiscal years, we have made the following acquisitions, including those of Continental prior to the merger: Date Acquired Entities Acquired Markets ------------- ----------------- ------- January 1994 Aspen Homes San Antonio April 1994 Joe Miller Homes, Inc. Minneapolis and Argus Development, Inc. November 1994 Heftler Realty Company Miami July 1995 Arappco, Inc. Greensboro September 1995 Regency Development, Inc. Birmingham June 1996 Westchester Homes Dallas October 1996 Trimark Communities, L.L.C. Denver December 1996 SGS Communities, Inc. New Jersey February 1997 The Torrey Group Atlanta, Charlotte, Greenville, and Raleigh/Durham February 1998 C. Richard Dobson Charleston, Charlotte, Builders, Inc. Greensboro, Greenville, Hilton Head, Jacksonville, Myrtle Beach, Newport News, Raleigh, Richmond, Wilmington April 1998 Continental Homes Phoenix, Austin, San Holding Corp. Diego, Dallas, Denver, Miami, San Antonio May 1998 Mareli Development & Louisville Construction Company, LLC June 1998 RMP Properties, Inc. Portland We will continue to evaluate potential future acquisition opportunities that satisfy our acquisition criteria in both existing and new markets. Decentralized Operations We decentralize our homebuilding activities to give more operating flexibility to our local division managers. We have 53 separate operating divisions, some of which are in the same market area. Generally, each operating division consists of a vice president, an office manager and staff, a sales manager and a construction manager. We believe that division managers, who are intimately familiar with local conditions, make better decisions regarding local operations than do the centralized, corporate management teams who make such decisions for many of our competitors. Our division managers receive performance bonuses based upon achieving targeted operating levels in their operating divisions. Each operating division is responsible for: o Site selection which involves -- A feasibility study -- Soil and environmental reviews -- Review of existing zoning and other governmental requirements -- Review of the need for and extent of offsite work required to meet local building codes o Negotiating lot option or similar contracts o Overseeing land development 3 o Planning its homebuilding schedule o Selecting building plans and architectural schemes o Obtaining all necessary building approvals o Developing a marketing plan Corporate office controls The corporate office controls key risk elements through centralized: o Financing o Cash management o Risk management o Accounting and management reporting o Payment of subcontractor invoices o Administration of payroll and employee benefits o Final approval of land and lot acquisitions o Capital allocation o Oversight of inventory levels Cost Management We control our overhead costs by centralizing administrative and accounting functions and by limiting the number of field administrative personnel and middle level management positions. We also minimize advertising costs by participating in promotional activities, publications and newsletters sponsored by local real estate brokers, mortgage companies, utility companies and trade associations. We control construction costs through the efficient design of our homes and by obtaining favorable pricing from certain subcontractors and national vendors based on the high volume of services they perform for us. We also control construction costs by monitoring expenses on each house through our purchase order system. We control capital and overhead costs by monitoring our inventory levels through our management information systems. Markets Homebuilding activities are conducted in five geographic regions, consisting of: Geographic Region Markets ----------------- ------- Mid-Atlantic........... Baltimore, Charleston, Charlotte, Greensboro, Greenville, Hilton Head, Myrtle Beach, New Jersey, Newport News, Raleigh/Durham, Richmond, Suburban Washington, D.C. and Wilmington Midwest................ Chicago, Cincinnati, Kansas City, Louisville, Minneapolis/St. Paul, St. Louis Southeast.............. Atlanta, Birmingham, Jacksonville, Nashville, Orlando, Pensacola, South Florida Southwest.............. Albuquerque, Austin, Dallas/Fort Worth, Houston, Killeen, Phoenix, San Antonio, Tucson West................... Denver, Las Vegas, Los Angeles, Portland, Sacramento, Salt Lake City, San Diego 4 When entering new markets or conducting operations in existing markets, among the things we consider are: o Regional economic conditions o Job growth o Land availability o Local land development process o Consumer tastes o Competition o Secondary home sales activity Our homebuilding revenues by geographic region are:
Year Ended September 30, ----------------------------------------- 1996 1997 1998 ---------- ---------- ---------- (In millions) Mid-Atlantic..................... $ 116.4 $ 180.5 $ 372.2 Midwest.......................... 88.5 95.9 130.4 Southeast........................ 115.2 246.4 384.5 Southwest........................ 624.4 694.3 789.6 West............................. 191.8 350.4 478.3 -------- -------- -------- Total.......................... $ 1,136.3 $ 1,567.5 $ 2,155.0 ======== ======== ========
Land Policies Typically, we acquire land and enter into lot option contracts to acquire developed building lots only after necessary "entitlements" have been obtained, i.e., when we have the right to begin development or construction. Before we acquire lots or tracts of land, we will, among other things, complete a feasibility study, which includes soil tests, independent environmental studies and other engineering work, and determine that all necessary zoning and other governmental entitlements required to develop and use the property for home construction have been acquired. At September 30, 1998, about 60% of our total lot position of 52,054 lots was being or had been developed by us. Although we purchase and develop land primarily to support our own homebuilding activities, occasionally we sell lots and land to other developers and homebuilders. We also use lot option contracts, where we purchase the right, but not the obligation, to buy building lots at predetermined prices on a takedown schedule commensurate with anticipated home closings. Lot option contracts generally are on a nonrecourse basis, thereby limiting our financial exposure to earnest money deposits given to property sellers. This enables us to control significant lot positions with minimal up front capital and substantially reduces the risks associated with land ownership and development. A summary of our land/lot position at September 30, 1998 is: Finished lots we own.................................................. 5,735 Lots under development we own......................................... 25,620 ------ Total lots owned..................................................... 31,355 Lots available under lot option and similar contracts................. 20,699 ------ Total land/lot position.............................................. 52,054 ======
5 We limit our exposure to real estate inventory risks by: o Generally commencing construction of homes under contract only after receipt of a satisfactory down payment and, where applicable, the buyer's receipt of mortgage approval o Limiting the number of speculative homes (homes started without an executed sales contract) built in each subdivision o Closely monitoring local market and demographic trends, housing preferences and related economic developments, such as new job opportunities, local growth initiatives and personal income trends o Utilizing lot option contracts, where possible o Limiting the size of acquired land parcels to smaller tracts of land Construction Our home designs are prepared by architects in each of our markets to appeal to local tastes and preferences of the community. We also offer optional interior and exterior features to enhance the basic home design and to promote our sales efforts. Substantially all of our construction work is performed by subcontractors. Our construction supervisors monitor the construction of each home, participate in material design and building decisions, coordinate the activities of subcontractors and suppliers, subject the work of subcontractors to quality and cost controls and monitor compliance with zoning and building codes. Subcontractors typically are retained for a specific subdivision pursuant to a contract that obligates the subcontractor to complete construction at a fixed price. Agreements with our subcontractors and suppliers generally are negotiated for each subdivision. We compete with other homebuilders for qualified subcontractors, raw materials and lots in the markets where we operate. Construction time for our homes depends on the weather, availability of labor, materials and supplies, size of the home, and other factors. We typically complete the construction of a home within four months. We do not maintain significant inventories of construction materials, except for work in process materials for homes under construction. Typically, the construction materials used in our operations are readily available from numerous sources. We have contracts exceeding one year with certain suppliers of our building materials that are cancellable at our option with a 30 day notice. In recent years, we have not experienced any significant delays in construction due to shortages of materials or labor. Marketing and Sales We market and sell our homes through commissioned employees and independent real estate brokers. Home sales typically are conducted from sales offices located in furnished model homes in each subdivision. At September 30, 1998, we owned 532 model homes, which generally are not offered for sale until the completion of a subdivision. Our sales personnel assist prospective homebuyers by providing them with floor plans, price information, tours of model homes and the selection of options and other custom features. We train and inform our sales personnel as to the availability of financing, construction schedules and marketing and advertising plans. In addition to using model homes, we typically build a limited number of speculative homes in each subdivision to enhance our marketing and sales activities. Construction of these speculative homes also is necessary to satisfy the requirement of relocated personnel and independent brokers, who often represent homebuyers requiring a completed home within 60 days. A majority of these speculative homes are sold while under construction or immediately following completion. The number of speculative homes is influenced by local market factors, such as new employment opportunities, significant job relocations, growing housing demand and the length of time we have built in the market. Depending upon the seasonality of each market, we attempt to limit our speculative homes in each subdivision. At September 30, 1998, we operated in 540 subdivisions and averaged 5 speculative homes, in various stages of construction, in each subdivision. 6 We advertise on a limited basis in newspapers and in real estate broker, mortgage company and utility publications, brochures, newsletters and billboards. To minimize advertising costs, we attempt to operate in subdivisions in conspicuous locations that permit us to take advantage of local traffic patterns. We also believe that model homes play a significant role in our marketing efforts. Consequently, we expend significant effort in creating an attractive atmosphere in our model homes. Our sales contracts require a down payment of at least $500. The contracts include a financing contingency which permit customers to cancel if they cannot obtain mortgage financing at prevailing interest rates within a specified period, typically four to six weeks, and may include other contingencies, such as the sale of an existing home. We include a home sale in our sales backlog when the sales contract is signed and we have received the initial down payment. We do not recognize revenue upon the sale of a home until it is closed and title passes to the homebuyer. The average period between the signing of a sales contract for a home and closing is approximately three to five months. Customer Service and Quality Control Our operating divisions are responsible for pre-closing, quality control inspections and responding to customers' post-closing needs. We believe that prompt and courteous response to homebuyers' needs during and after construction reduces post-closing repair costs, enhances our reputation for quality and service, and ultimately leads to significant repeat and referral business from the real estate community and homebuyers. We provide our homebuyers with a limited one-year warranty on workmanship and building materials. The subcontractors who perform most of the actual construction also provide warranties of workmanship to us and are generally prepared to respond to us and the homeowner promptly upon request. In most cases, we supplement our one-year warranty by purchasing a ten-year limited warranty from a third party. To cover our potential warranty obligations, we accrue an estimated amount for future warranty costs. Customer Financing We provide mortgage financing services principally to purchasers of homes we build and sell. CH Mortgage, a wholly-owned subsidiary, provides mortgage banking services in Arizona, Colorado, Kentucky, Nevada, North and South Carolina, Minnesota, Texas and Florida. D.R. Horton Mortgage Company, Ltd., a joint venture formed in 1998 with a third party, presently provides services in California. On a combined basis, related mortgage banking entities provided mortgage financing services for about 42% of the homes closed during the year ended September 30, 1998. We anticipate expanding these mortgage activities to other markets we serve. In other markets where we currently do not provide mortgage financing, we work with a variety of mortgage lenders that make available to homebuyers a range of conventional mortgage financing programs. By making information about these programs available to prospective homebuyers and maintaining a relationship with such mortgage lenders, we are able to coordinate and expedite the entire sales transaction by ensuring that mortgage commitments are received and that closings take place on a timely and efficient basis. Title Services Through our wholly-owned subsidiaries, DRH Title Company of Texas, Ltd., DRH Title Company of Florida, Inc., DRH Title Company of Minnesota, Inc. and Travis County Title Company, we serve as a title insurance agent by providing title insurance policies and closing services to purchasers of homes we build and sell in the Dallas/Fort Worth, Austin, Orlando, Miami, Minneapolis and San Antonio markets. We assume no underwriting risk associated with these title policies. Employees At September 30, 1998, we employed 2,465 persons, of whom 629 were sales and marketing personnel, 757 were executive, administrative and clerical personnel, 844 were involved in construction, and 235 worked in mortgage and title operations. Fewer than 25 of our employees are covered by collective 7 bargaining agreements. Some of the subcontractors which we use are represented by labor unions or are subject to collective bargaining agreements. We believe that our relations with our employees and subcontractors are good. Competition The single family residential housing industry is highly competitive, and we compete in each of our markets with numerous other national, regional and local homebuilders, often with larger subdivisions designed, planned and developed by such homebuilders. Our homes compete on the basis of quality, price, design, mortgage financing terms and location. Governmental Regulation and Environmental Matters The housing, mortgage and title insurance industries are subject to extensive and complex regulations. We and our subcontractors must comply with various federal, state and local laws and regulations including zoning, density and development requirements, building, environmental, advertising and consumer credit rules and regulations, as well as other rules and regulations in connection with our development, homebuilding and sales activities. These include requirements affecting the development process as well as building materials to be used, building designs and minimum elevation of properties. Our homes are inspected by local authorities where required, and homes eligible for insurance or guarantees provided by the FHA and VA are subject to inspection by them. These regulations often provide broad discretion to the administering governmental authorities. This can delay or increase the cost of development or homebuilding. We also are subject to a variety of local, state and federal statutes, ordinances, rules and regulations concerning protection of health and the environment. The particular environmental laws for each site vary greatly according to location, environmental condition and the present and former uses of the site and adjoining properties. These environmental laws may result in delays, may cause us to incur substantial compliance and other costs, and can prohibit or severely restrict development and homebuilding activity in certain environmentally sensitive regions or areas. Our internal mortgage activities and title insurance agencies must also comply with various federal and state laws, consumer credit rules and regulations and rules and regulations unique to such activities. Additionally, mortgage loans and title activities originated under the FHA, VA, FNMA and GNMA are subject to rules and regulations imposed by those agencies. ITEM 2. PROPERTIES We own a 52,000 square foot office complex, consisting of three single-story buildings of steel and brick construction, located in Arlington, Texas, that serves as the principal executive offices and houses two of the Dallas/Fort Worth divisions. We also lease approximately 213,000 square feet of space for our operating divisions under leases expiring between October 1998 and June 2006. ITEM 3. LEGAL PROCEEDINGS We are a party to routine litigation incidental to our business. Such matters, if decided adversely to us, would not, in the opinion of management, have a material adverse effect upon our financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 8 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Our common stock (the "Common Stock") is listed on the New York Stock Exchange under the symbol "DHI". The following table sets forth the high and low sales prices for the Common Stock for the periods indicated.
Year Ended September 30, -------------------------------------------- 1997 1998 ------------------- -------------------- HIGH LOW HIGH LOW -------- -------- --------- -------- Quarter Ended December 31 . . . . . $ 11 3/8 $ 8 5/8 $ 21 $ 15 Quarter Ended March 31. . . . . . . 13 10 1/8 23 5/8 16 5/8 Quarter Ended June 30 . . . . . . . 12 1/2 9 24 16 5/8 Quarter Ended September 30 . . . . 17 1/4 10 3/16 24 15/16 15 1/4
As of November 30, 1998, the closing price was $18 7/8, and there were approximately 286 holders of record. We have declared quarterly cash dividends of 2 cents per share for fiscal 1997 and 2 1/4 cents per share for fiscal 1998. The declaration of cash dividends is at the discretion of our Board of Directors and will depend upon, among other things, future earnings, cash flows, capital requirements, our general financial condition and general business conditions. We are required to comply with certain covenants contained in the bank agreements and Senior Notes indentures. The most restrictive of these requirements allows us to pay cash dividends on common stock in an amount, on a cumulative basis, not to exceed 50% of consolidated net income, as defined, subject to certain other adjustments. Pursuant to the most restrictive of these requirements, we had approximately $65.6 million available for the payment of dividends at September 30, 1998. ITEM 6. SELECTED FINANCIAL DATA The following selected consolidated financial data are derived from our Consolidated Financial Statements. The data should be read in conjunction with the Consolidated Financial Statements, related Notes thereto and other financial data elsewhere herein. These historical results are not necessarily indicative of the results to be expected in the future.
Year Ended September 30, ---------------------------------------------------- 1994 1995 1996 1997 1998 -------- -------- -------- -------- -------- Income Statement Data: (1) (2) Revenues ($ millions)................................. $ 741.4 $ 869.5 $1,147.7 $1,578.4 $2,176.9 Homebuilding revenues ($ millions).................... 734.4 862.8 1,136.3 1,567.5 2,155.0 Net income from continuing operations ($ millions).... 30.7 34.4 53.2 65.0 93.4 Net income per share from continuing operations: Basic.............................................. .75 .80 1.15 1.28 1.75 Diluted............................................ .72 .77 1.07 1.15 1.56 Cash dividends declared per common share (3).......... -- -- -- .06 .09
9
As of September 30, ---------------------------------------------------- 1994 1995 1996 1997 1998 -------- -------- -------- -------- -------- ($ millions) Balance Sheet Data: (1) (2) Inventories........................................... $ 409.5 $ 574.2 $ 690.2 $1,024.3 $1,358.0 Total Assets.......................................... 536.4 705.6 841.3 1,248.3 1,667.8 Notes Payable......................................... 276.9 402.7 420.4 650.7 854.5 Stockholders' Equity.................................. 183.1 216.6 306.6 427.9 549.4 - ---------- (1) See Note C to the audited financial statements for details concerning acquisitions by the Company. (2) On April 20, 1998, Horton and Continental consummated a merger pursuant to which Continental was merged into the Company, with 2.25 shares of the Company common shares being exchanged for each outstanding share of Continental. Approximately 15.5 million Horton common shares were issued to effect the merger. The merger with Continental was treated as a pooling of interests for accounting purposes. Therefore, all financial amounts have been restated as if Continental and the Company had been combined throughout the periods presented. Prior to the merger, Continental had a fiscal year end of May 31. Accordingly, the Continental consolidated balance sheets as of May 31, 1994, 1995 and 1996 have been combined with the Company's balance sheets as of September 30, 1994, 1995 and 1996, respectively. The related Continental statements of income, stockholders' equity and cash flows for the years ended May 31, 1994, 1995 and 1996 have been combined with the Company's statements of income, stockholders' equity and cash flows for the fiscal years ended September 30, 1994, 1995 and 1996, respectively. Continental's balance sheet and the related statements of income, stockholders' equity and cash flows have been restated to conform to the Company's fiscal year end of September 30, 1997. As permitted by regulations of the Securities and Exchange Commission, Continental's four-month period ended September 30, 1996 has been omitted from the financial statements. Continental's revenues, cost of sales, income before taxes and net income for this four month period were $234.4 million, $191.6 million, $18.8 million and $11.2 million, respectively. (3) Cash dividends per common share represent those dividends declared to D.R. Horton, Inc. shareholders, unadjusted for the merger. (4) In 1998, net income includes the net effect of a $7.1 million, net of tax, provision for costs associated with the merger with Continental. The earnings per share effect was $0.13 basic and $0.11 diluted.
10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Results of Operations -- Consolidated D.R. Horton, Inc. and subsidiaries (the "Company") provide homebuilding activities in 23 states and 41 markets through its 53 homebuilding divisions. Through its financial services activities, the Company also provides mortgage banking and title agency services in many of these same markets. On April 20, 1998, D.R. Horton, Inc. ("Horton") acquired Continental Homes Holding Corp. ("Continental"), a geographically diversified homebuilder, through the merger of Continental into Horton (the "Merger"). In the Merger, Horton issued approximately 15.5 million shares of its common stock, and Continental's outstanding convertible securities and options became convertible into or exercisable for an additional approximately 8.2 million shares. The Merger was accounted for as a pooling of interests. Accordingly, Horton's financial information for prior periods has been restated to show the combined results of Horton and Continental. In the description of business that follows, the business of Continental has been combined with Horton as though Continental had been a part of Horton throughout the periods described. Year Ended September 30, 1998 Compared to Year Ended September 30, 1997 Consolidated revenues increased 37.9% to $2,176.9 million in 1998 from $1,578.4 million in 1997 due to increases in both homebuilding and financial services revenues. Consolidated selling, general and administrative (SG&A) expenses increased 34.9% to $231.7 million in 1998 from $171.8 million in 1997. As a percentage of consolidated revenues, SG&A expenses decreased to 10.6% in 1998 from 10.9% in 1997. Consolidated 1998 SG&A expenses exclude $11.9 million in non-recurring costs associated with the Merger with Continental. The merger costs consisted primarily of fees to third party investment, accounting and legal advisors. Consolidated interest expense increased to $16.2 million in 1998 from $10.9 million in 1997 due to the increased interest costs associated with the Company's rapidly expanding financial services operations, increased debt levels from acquisitions and expansion of homebuilding activities. Financial services interest expense grew from $0.7 million in 1997 to $2.2 million in 1998. As a percentage of consolidated revenues, interest expense was 0.7% in both 1998 and 1997. Consolidated other income consists mainly of interest income on funds temporarily invested and, for financial services operations, on mortgage loans held for sale. In 1998, consolidated other income was $7.6 million, up $2.2 million from 1997, primarily due to larger amounts of temporarily investable funds and mortgage loans held for sale. Non-recurring merger costs associated with the Continental merger were $11.9 million and consisted primarily of fees paid to third party investment, accounting, and legal advisors. The consolidated provision for income taxes increased 50.8%, to $65.7 million in 1998, from $43.6 million in 1997, due in part to the corresponding increase in income before income taxes. As a percentage of consolidated revenues, the income tax provision increased by 0.2% to 3.0% in 1998. The increase as a percentage of revenues was due primarily to an increase in the total effective income tax rate in 1998, from 40.2% to 41.3%, caused by the non-deductibility of certain of the 1998 merger costs and increased earnings in states with higher effective tax rates. Year Ended September 30, 1997 Compared to Year Ended September 30, 1996 Consolidated revenues increased 37.5% to $1,578.4 million in 1997 from $1,147.7 million in 1996 due to the increase in homebuilding revenues. Revenues from financial services operations decreased by 4.5% in 1997 due to a 1996 sale of servicing rights that resulted in recognition of $0.9 million of revenue in 1996. 11 Consolidated SG&A expenses increased by 39.5% to $171.8 million in 1997 from $123.1 million in 1996. As a percentage of consolidated revenues, consolidated SG&A expenses increased to 10.9% in 1997 from 10.7% in 1996 due in part to startup expenses incurred in new financial services markets. Consolidated interest expense increased to $10.9 million in 1997 from $9.2 million in 1996, primarily due to the corresponding increase in inventories and acquisitions financed through available lines of credit. As a percentage of consolidated revenues, interest expense decreased to 0.7% in 1997 from 0.8% in 1996. Consolidated other income, which consists mainly of interest income on funds temporarily invested and, for financial services operations, on mortgage loans held for resale, increased to $5.4 million in 1997 from $4.5 million in 1996. The consolidated provision for income taxes increased 18.9%, to $43.6 million in 1997 from $36.6 million in 1996, due in part to the corresponding increase in income before income taxes. The effective tax rate decreased to 40.2% in 1997 from 40.8% in 1996, due to greater earnings in states with lower tax rates. Results of Operations -- Homebuilding The following tables set forth certain operating and financial data for the Company's homebuilding activities:
Percentages of Homebuilding Revenues Years Ended September 30, -------------------------- 1996 1997 1998 ------ ------ ------ Costs and expenses: Cost of sales................................. 81.8% 82.4% 81.9% Selling, general and administrative expense... 10.2 10.4 10.0 Interest expense.............................. 0.7 0.7 0.7 ------ ------ ------ Total costs and expenses........................ 92.7 93.5 92.6 Other (income).................................. (0.2) (0.2) (0.2) ------ ------ ------ Income before income taxes...................... 7.5% 6.7% 7.6% ====== ====== ======
Years Ended September 30, ------------------------------------------------ 1996 1997 1998 -------------- -------------- -------------- Homes Homes Homes Homes Closed* Closed % Closed % Closed % - ------------ ------ ------- ------ ------- ------ ------- Mid-Atlantic.................. 547 7.2% 843 8.4% 2,056 14.7% Midwest....................... 457 6.0% 500 5.0% 701 5.0% Southeast..................... 719 9.4% 1,583 15.8% 2,595 18.6% Southwest..................... 4,915 64.2% 5,324 53.0% 6,145 44.1% West.......................... 1,013 13.2% 1,788 17.8% 2,447 17.6% ------ ------- ------ ------- ------ ------- 7,651 100.0% 10,038 100.0% 13,944 100.0% ====== ======= ====== ======= ====== =======
12
Years Ended September 30, --------------------------------------------------- 1996 1997 1998 --------------- ---------------- ---------------- Homes Homes Homes Net New Sales Contracts* Sold $ Sold $ Sold $ - ----------------------- ----- -------- ------ -------- ------ -------- ($ millions) Mid-Atlantic................ 495 $ 106.9 849 $ 173.0 2,384 $ 440.6 Midwest..................... 527 101.0 496 96.6 888 169.5 Southeast................... 796 120.5 1,705 253.3 2,608 395.2 Southwest................... 5,254 660.8 5,571 709.9 7,161 952.6 West........................ 1,360 265.5 1,930 362.9 2,911 575.3 ----- -------- ------ -------- ------ -------- 8,432 $1,254.7 10,551 $1,595.7 15,952 $2,533.2 ===== ======== ====== ======== ====== ======== Years Ended September 30, -------------------------------------------------- 1996 1997 1998 --------------- --------------- ---------------- Sales Backlog* Homes $ Homes $ Homes $ - ------------- ------ ------- ------ ------- ------ -------- ($ millions) Mid-Atlantic................ 146 $ 34.4 334 $ 68.9 932 $ 180.9 Midwest..................... 184 34.9 180 35.5 419 80.5 Southeast................... 353 51.1 697 101.2 733 116.3 Southwest................... 1,973 256.6 2,027 260.8 3,043 423.9 West........................ 618 127.4 723 142.8 1,214 251.3 ------ ------- ------ ------- ------ -------- 3,274 $ 504.4 3,961 $ 609.2 6,341 $1,052.9 ====== ======= ====== ======= ====== ======== - ---------- *- The Company's market regions consist of the following: Mid-Atlantic Baltimore, Charleston, Charlotte, Greensboro, Greenville, Hilton Head, Myrtle Beach, New Jersey, Newport News, Raleigh/Durham, Richmond, Suburban Washington, D. C. and Wilmington Midwest Chicago, Cincinnati, Kansas City, Louisville, Minneapolis/St. Paul and St. Louis Southeast Atlanta, Birmingham, Jacksonville, Nashville, Orlando, Pensacola and South Florida Southwest Albuquerque, Austin, Dallas/Fort Worth, Houston, Killeen, Phoenix, San Antonio and Tucson West Denver, Las Vegas, Los Angeles, Portland, Sacramento, Salt Lake City and San Diego
Year Ended September 30, 1998 Compared to Year Ended September 30, 1997 Revenues from homebuilding activities increased 37.5% to $2,155.0 million (13,944 homes closed) in 1998 from $1,567.5 million (10,038 homes closed) in 1997, despite a decrease in land sales from $34.8 million in 1997 to $16.8 million in 1998. The number of homes closed increased in all of the Company's market regions, with percentage increases ranging from 143.9% in the Mid-Atlantic region to 15.4% in the Southwest region. The increases in both revenues and homes closed were due to strong housing demand, the Company's entrance into new markets, and the home closings associated with the acquisitions of C. Richard Dobson Builders, Inc. (Dobson), which was acquired in February, 1998; Mareli Development & Construction Co. (Mareli) of Louisville, Kentucky, acquired in May, 1998; and RMP Development, Inc. (RMP) of Portland, Oregon, acquired in June, 1998. In markets in which the Company operated during both fiscal years, revenues increased by 26.5% to $1,939.4 million (12,591 homes closed). The average selling price of homes closed in 1998 was $153,300, substantially unchanged from 1997. New net sales contracts increased 51.2% to 15,952 homes in 1998 from 10,551 in 1997. Percentage increases in new net sales contracts ranging from 180.8% to 28.5% were achieved in the Company's market regions. The increases in new net sales contracts were due in part to sales achieved by the 1998 acquisitions. In markets in which the Company operated in both fiscal years, new net sales contracts increased 37.2%, to 14,480 homes. The average amount of new net sales contracts in 1998 was $158,800, up 5.0% from the $151,200 average in 1997. 13 The Company was operating in 540 subdivisions at September 30, 1998, compared to 377 at September 30, 1997. At September 30, 1998, the Company's backlog of sales contracts was $1,052.9 million (6,341 homes), up 72.8% from the comparable amount at September 30, 1997. In markets in which the Company operated during both fiscal years, the sales contract backlog was $978.9 million (5,850 homes), up 60.7% from 1997. The average sales price of homes in sales backlog was $166,000 at September 30, 1998, up 7.9% from the $153,800 average at September 30, 1997. Cost of sales increased by 36.6%, to $1,765.6 million in 1998 from $1,292.6 million in 1997. The increase in cost of sales was attributable to the increase in revenues. Cost of sales as a percentage of revenues decreased by 0.5%, to 81.9% in 1998 from 82.4% in 1997, due to excellent housing demand allowing increases in selling prices in certain markets, efforts to enhance gross margins through efficiencies and materials discounts and purchase accounting adjustments in 1997 that required the Company to increase its basis in acquired inventory. Selling, general and administrative (SG&A) expenses from homebuilding activities increased by 32.8% to $216.4 million in 1998 from $163.0 million in 1997. As a percentage of revenues, SG&A expenses decreased to 10.0% in 1998 from 10.4% in 1997. The decrease in SG&A expenses as a percentage of revenues is primarily due to the Company's cost containment efforts, the increased revenues that absorb the fixed elements of overhead, and costs associated with integrating the 1997 acquisitions into the Company. Interest expense associated with homebuilding activities increased to $14.0 million in 1998 from $10.2 million in 1997 due to the increase in debt associated with the growth of the Company both internally and through acquisitions. As a percentage of homebuilding revenues, homebuilding interest expense was 0.7% in both 1998 and 1997. The Company follows a policy of capitalizing interest only on inventory under construction or development. During both 1998 and 1997, the Company expensed the portion of incurred interest and other financing costs which could not be charged to inventory. Capitalized interest and other financing costs are included in cost of sales at the time of home closings. Year Ended September 30, 1997 Compared to Year Ended September 30, 1996 Revenues from homebuilding activities increased by 37.9% to $1,567.5 million in 1997 from $1,136.3 million in 1996. The number of homes closed by the Company increased by 31.2% to 10,038 homes in 1997 from 7,651 in 1996. Home closings increased in all of the Company's market regions, with percentage increases ranging from 120.2% in the Southeast region to 8.3% in the Southwest region. The increases in both revenues and homes closed were due in part to the February 1997 acquisition of Torrey. From its acquisition through September 30, 1997, Torrey closed 962 homes, with revenues totalling $140.8 million. For 1997, Torrey accounted for 9.6% of homes closed and 9.0% of the revenues generated. Excluding Torrey, 1997 revenues increased by 25.6% to $1,426.7 million. The average price of homes closed increased 3.9% to $152,600 in 1997 from $146,900 in 1996 due to changes in the geographic mix of homes closed within the Company and different price points in certain markets. New net sales contracts increased 25.1% to 10,551 homes in 1997 from 8,432 in 1996. Percentage increases in the dollar value of new net sales contracts ranging from 110.2% to 7.4% were achieved in four of the Company's five market regions, with a 4.4% decline experienced in the Midwest region. From its acquisition through September 30, 1997, Torrey's new net sales contracts were $153.8 million (1,049 homes). Excluding Torrey, the Company's new net sales contracts were $1,441.9 million (9,502 homes), a 14.9% increase over 1996. The average selling price of new sales contracts in 1997 was $151,200, up 1.6% from the 1996 average selling price of $148,800. The Company was operating in 377 subdivisions at September 30, 1997, compared to 253 at September 30, 1996. At September 30, 1997, the Company's backlog of sales contracts was $609.2 million (3,961 homes), a 20.8% increase over the comparable figure at September 30, 1996. At September 30, 1997, Torrey 14 held a sales contract backlog of $61.8 million (413 homes). Excluding Torrey, the Company's sales contract backlog at September 30, 1997, was $547.4 million (3,548 homes), up 8.5% from the prior year. The average sales price of homes in backlog was $153,800 at September 30, 1997, down 0.2% from $154,100 at September 30, 1996. Cost of sales increased by 39.0% to $1,292.6 million in 1997 from $930.1 million in 1996. The increase in cost of sales accompanied the increase in revenues. Cost of sales as a percentage of revenues increased by 0.6% to 82.4% in 1997 from 81.8% in 1996, due to competitive pressures causing lower gross margins in the Austin and California markets and the effects of purchase accounting adjustments requiring the Company to increase its basis in inventory acquired with Trimark, SGS and Torrey. Total selling, general and administrative (SG&A) expenses from homebuilding activities increased by 40.4% to $163.0 million in 1997 from $116.1 million in 1996. As a percentage of homebuilding revenues, SG&A expenses increased to 10.4% in 1997 from 10.2% in 1996. Absent the SG&A costs associated with integrating the three 1997 acquisitions, SG&A expenses as a percentage of homebuilding revenues would have decreased by 0.2% to 10.0% in 1997. Interest expense associated with homebuilding activities increased to $10.2 million in 1997 from $7.5 million in 1996 due to the corresponding increase in homebuilding revenues. As a percentage of homebuilding revenues, homebuilding interest expense was 0.7% in both 1997 and 1996. The Company follows a policy of capitalizing interest only on inventory under construction or development. During both 1997 and 1996, the Company expensed the portion of incurred interest and other financing costs which could not be charged to inventory. Capitalized interest and other financing costs are included in cost of sales at the time of home closings. Results of Operations -- Financial Services Financial services include mortgage financing and title insurance agency and closing services, primarily related to purchases of homes built and sold by the Company. Mortgage services are provided in California, Nevada, Arizona, Colorado, Texas, Florida, Kentucky, Minnesota and North and South Carolina. Title agency and closing services are provided in Texas, Florida and Minnesota. The following table summarizes financial and other information for the Company's financial services operations:
Year Ended September 30, ---------------------------- 1996 1997 1998 -------- -------- -------- ($ in thousands) Financial Services: Number of loans originated..................... 2,916 3,157 5,875 -------- -------- -------- Loan acquisition fees.......................... $ 2,758 $ 3,174 $ 5,929 Sale of servicing rights and gains from sale of mortgages....................... 6,177 4,666 9,276 Other revenues................................. 1,005 1,515 1,998 -------- -------- -------- Total mortgage banking revenues................ 9,940 9,355 17,203 Title policy premiums, net..................... 1,541 1,612 4,689 -------- -------- -------- Total revenues................................. 11,481 10,967 21,892 General and administrative expenses............ 7,028 8,733 15,244 Interest expense............................... 1,785 664 2,220 Interest/other (income)........................ (2,101) (1,396) (2,668) -------- -------- -------- Income before income taxes..................... $ 4,769 $ 2,966 $ 7,096 ======== ======== ========
Year Ended September 30, 1998 Compared to Year Ended September 30, 1997 Revenues from financial services operations increased 99.6% to $21.9 million in 1998 from $11.0 million in 1997. The increase in financial services revenues was due to the rapid expansion of the Company's title agency and mortgage loan services provided to the Company's homebuilding customers. 15 Accordingly, SG&A expenses associated with financial services increased 74.6%, to $15.2 million in 1998 from $8.7 million in 1997. As a percentage of financial services revenues, SG&A expenses decreased by 10.0% to 69.6% in 1998 from 79.6% in 1997 due primarily to higher than normal 1997 startup expenses in new markets. Year Ended September 30, 1997 Compared to Year Ended September 30, 1996 Revenues from financial services operations decreased by 4.5% to $11.0 million in 1997 from $11.5 million in 1996 due to a sale of servicing rights that resulted in recognition of $0.9 million of revenues in 1996. SG&A expenses associated with financial services increased by 24.3% to $8.7 million in 1997 from $7.0 million in 1996 due to startup expenses in new markets. This increase caused financial services SG&A expenses as a percentage of revenues to increase to 79.6% in 1997 from 61.2% in 1996. Financial Condition, Liquidity and Capital Resources At September 30, 1998, the Company had available cash and cash equivalents of $76.8 million. Inventories (including finished homes, construction in progress, and developed residential lots and other land) at September 30, 1998 had increased by $333.8 million since September 30, 1997, partly due to the acquisitions of the assets (primarily inventories) of Dobson, Mareli, and RMP. Inventories also increased due to a general increase in business activity and the expansion of operations in all of the Company's market areas. Although the inventory increase and the acquisitions of Dobson, Mareli and RMP were financed primarily by borrowing under the revolving credit facility, the increased borrowing was partially offset by the conversion of $27.5 million of 6 7/8% convertible subordinated notes to common stock. As a result, the Company's ratio of notes payable to total capital at September 30, 1998 was 60.9%, an increase of only 0.6% over the September 30, 1997 level of 60.3%. During fiscal 1998, the Company's Board of Directors declared four quarterly cash dividends of $.0225 per common share, the last of which is payable on October 23, 1998, to stockholders of record on October 16, 1998. On April 20, 1998, the Company closed its merger with Continental. In accordance with the terms of the merger agreement, a total of 15.5 million shares of D.R. Horton, Inc. common stock were exchanged for all of the Continental common stock outstanding, based upon an exchange ratio of 2.25. At the time of the merger, the Company assumed Continental's existing public debt, consisting of $150 million in 10% senior notes due April 15, 2006 and $86.1 million (convertible into 8.2 million shares of Horton common stock) in 6 7/8% convertible subordinated notes due November 1, 2002. Of the convertible notes, $27.5 million have been converted to common stock as of September 30, 1998, and the remainder were converted in October 1998. At September 30, 1998, the Company had outstanding debt of $854.5 million, of which $455.0 million represented advances under the bank credit facility. On April 21, 1998, the Company increased and restructured its unsecured bank credit facility to $825 million consisting of a $775 million four-year revolving loan and a $50 million four-year letter of credit facility. At September 30, 1998, under the debt covenants associated with the restructured bank credit facility, the Company had additional borrowing capacity of $364.5 million. Because the bank credit facility has a floating rate, the Company has entered into multi-year fixed interest swap agreements with notional amounts aggregating $300 million. The mortgage company has a $75 million, one-year maturity bank warehouse facility that is secured by mortgage loans held for sale. The warehouse facility is not guaranteed by the parent company. As of September 30, 1998, $28.5 million had been drawn under this facility, with additional financing needs provided by the Company. In the future, it is anticipated that all mortgage company activities will be financed under the warehouse facility. In February 1998, the Company completed the acquisition of all of the outstanding stock of Dobson, and certain of its affiliated companies for $23.4 million. Dobson's assets, primarily inventories, amounted to approximately $64.3 million. Total liabilities assumed amounted to approximately $52.4 million, including notes payable of $49.3 million, which were paid at closing. In May and June 1998, the Company completed the acquisition of the principal assets 16 (approximately $16.9 million, primarily inventories) of Mareli, of Louisville, Kentucky, and RMP, of Portland, Oregon, for $8.1 million in cash, 70,249 shares of Horton common stock valued at $1.1 million, and the assumption of approximately $16.0 million in trade accounts and notes payable associated with the acquired assets. Mareli's and RMP's liabilities included $13.3 million in notes payable which were paid at closing. These acquisitions were accounted for under the purchase method and funded through available lines of credit. The Company's rapid growth and acquisition strategies require significant amounts of cash. It is anticipated that future home construction, lot and land purchases and acquisitions will be funded through internally generated funds and new and existing credit facilities. The Company maintains a universal shelf registration statement with a capacity of $400 million. Additionally, a shelf registration has been filed for 10 million shares of common stock issuable to effect, in whole or in part, possible future acquisitions. Market conditions will determine when and whether the Company will issue additional securities using the shelf registration statements. The Company continuously evaluates its capital structure and, in the future, may seek to further increase unsecured debt and obtain additional equity to fund ongoing operations as well as to pursue additional growth opportunities. At September 30, 1998, except for ordinary expenditures for the construction of homes and the acquisition of land and lots for development and sale of homes, the Company had no material commitments for capital expenditures. Inflation The Company and the homebuilding industry in general, may be adversely affected during periods of high inflation, primarily because of higher land and construction costs. Inflation also increases the Company's financing, labor and material costs. In addition, higher mortgage interest rates significantly affect the affordability of permanent mortgage financing to prospective homebuyers. The Company attempts to pass through to its customers any increases in its costs through increased sales prices and, to date, inflation has not had a material adverse effect on the Company's results of operations. However, there is no assurance that inflation will not have a material adverse impact on the Company's future results of operations. Year 2000 The "Year 2000" issue (Y2K) refers to potential complications that may be caused by computer hardware and software that were not designed for the change in the century. If not corrected, such computer hardware and software may cause management information systems to fail or miscalculate data. The Company has assessed (and continues to assess) its vulnerability to Y2K, particularly in light of its merger with Continental. Modifications and replacements of computer hardware and software to prepare for Y2K are ongoing. The Company has assessed and tested its principal homebuilding hardware and management information system used in homebuilding operations and believes them to be Y2K compliant. Evaluation, modification and testing of non-principal hardware and management information systems used in homebuilding operations are in process and such systems are expected to be converted to the principal management information system or Y2K modifications are expected to be completed by June, 1999, at a cost of less than one million dollars. Management information systems for the Company's financial services activities also are being evaluated and will require modifications or upgraded software packages that are expected to be completed by June, 1999, at minimal costs. As part of a program on continuous technology updates, for the past several years, the Company has upgraded personal computers in its locations and this process will continue. As this occurs during 1999, personal computers at each company location will be tested for Y2K compliance. These personal computer upgrades are considered to be ongoing and are not considered to be specifically Y2K related. The Company expects to incur costs to replace or repair such equipment, but has not presently determined the amount of these costs. 17 The Company is presently evaluating other potential Y2K issues, including non-management information systems. A Y2K coordinator is directing the Company's overall effort to address these issues. As part of these reviews, the Company's relationships with payroll service providers, vendors, contractors, financial institutions and other third parties will be reviewed to determine the impact, if any, Y2K will have on these relationships. The Company expects to incur Y2K specific costs in the future, but does not anticipate that these costs will be material. It is possible that the Company could encounter disruptions to its business that could have a material adverse effect on its results of operations if all systems are not Y2K compliant. Also, the Company could be materially impacted by widespread economic or financial market disruptions or by Y2K computer system failures at government agencies on which the Company is dependent for utilities, zoning, building permits and related matters. There can be no assurance that Y2K will not adversely affect the Company and its operations. A formal Y2K internal contingency plan has not been prepared at this time due to the variety of alternatives available to the Company. Specifically, the Company is presently evaluating a new management information system that, if necessary, could potentially be installed by the end of 1999, or non-principal homebuilding management information systems could be converted to the principal homebuilding system before Y2K compliance became an issue. Market Risk The Company is subject to interest rate risk on its long term debt. The Company manages its exposure to changes in interest rates by optimizing the use of variable and fixed rate debt. In addition, the Company hedges its exposure to changes in interest rates on its variable rate bank debt by entering into interest rate swap agreements to lock in a fixed interest rate for a portion of these borrowings. The following table sets forth, as of September 30, 1998, the Company's long term debt obligations, principal cash flows by scheduled maturity, weighted average interest rates and estimated fair market value. In addition, the table sets forth the notional amounts and weighted average interest rates of the Company's interest rate swaps.
Year Ended September 30, ($ in millions) FMV @ 1999 2000 2001 2002 2003 Thereafter Total 9/30/98 ------ ------ ------ ------ ------ ---------- ------- ------- Debt: Fixed rate.............. $ 63.5 $ 0.6 $ 0 $ 0.2 $ 0.4 $ 294.9 $ 359.6 $ 396.9 Average interest rate... 7.02% 8.80% -- 8.50% 8.50% 9.19% 8.80% -- Variable rate........... $ 39.9 $ 0 $ 0 $455.0 $ 0 $ 0 $ 494.9 $ 494.9 Average interest rate... 7.40% -- -- 6.06% -- -- 6.17% -- Interest Rate Swaps: Variable to fixed....... $300.0 $300.0 $300.0 $200.0 $200.0 $ 200.0 -- $ (0.4) Average pay rate........ 5.53% 5.53% 5.36% 5.10% 5.10% 5.09% -- -- Average receive rate.... 90 day LIBOR
18 Safe Harbor Statement Certain statements contained herein, as well as statements made by the Company in periodic press releases and oral statements made by the Company's officials to analysts and stockholders in the course of presentations about the Company may be construed as "Forward-Looking Statements" as defined in the Private Securities Litigation Reform Act of 1995. Such statements may involve unstated risks, uncertainties and other factors that may cause actual results to differ materially from those initially anticipated. Such risks, uncertainties and other factors include, but are not limited to: o The Company's substantial leverage o Changes in general economic and market conditions o Changes in interest rates and the availability of mortgage financing o Changes in costs and availability of material, supplies and labor o General competitive conditions o The availability of capital o The ability to successfully effect acquisitions 19 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page ---- Report of Independent Auditors............................................ 21 Consolidated Balance Sheets, September 30, 1997 and 1998.................. 22 Consolidated Statements of Income for the three years ended September 30, 1998.................................................. 23 Consolidated Statements of Stockholders' Equity for the three years ended September 30, 1998............................................ 24 Consolidated Statements of Cash Flows for the three years ended September 30, 1998.................................................. 25 Notes to Consolidated Financial Statements................................ 26 20 REPORT OF INDEPENDENT AUDITORS The Board of Directors D.R. Horton, Inc. We have audited the accompanying consolidated balance sheets of D.R. Horton, Inc. and subsidiaries as of September 30, 1998 and 1997, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended September 30, 1998. These financial statements are the responsibility of the management of D.R. Horton, Inc. and subsidiaries. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the 1996 financial statements of Continental Homes Holding Corp. ("Continental") which statements reflect total revenues constituting 52% of the related consolidated totals. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to data included for Continental, is based solely on the report of the other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and, for 1996, the report of other auditors, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of D.R. Horton, Inc. and subsidiaries, at September 30, 1998 and 1997, and the consolidated results of their operations and their cash flows for each of the three years in the period ended September 30, 1998, in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP Fort Worth, Texas November 12, 1998 21 D.R. HORTON, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
As of September 30, ------------------------- 1997 1998 ----------- ----------- ASSETS (In thousands) Homebuilding: Cash................................................. $ 78,228 $ 76,754 Inventories: Finished homes and construction in progress...... 531,941 717,709 Residential lots - developed and under development............................. 479,553 630,252 Land held for development........................ 12,774 10,072 ----------- ----------- 1,024,268 1,358,033 Property and equipment (net)......................... 16,988 25,456 Earnest money deposits and other assets.............. 56,420 74,827 Excess of cost over net assets acquired (net)........ 37,717 56,782 ----------- ----------- 1,213,621 1,591,852 ----------- ----------- Financial Services: Mortgage loans held for sale......................... 34,072 72,325 Other assets......................................... 630 3,658 ----------- ----------- 34,702 75,983 ----------- ----------- $ 1,248,323 $ 1,667,835 =========== =========== LIABILITIES Homebuilding: Accounts payable and other liabilities............... $ 165,309 $ 259,005 Notes payable: Unsecured: Revolving credit facility due 2002............ 227,275 455,000 8 3/8% senior notes due 2004, net............. 147,370 147,754 10% senior notes due 2006, net................ 148,462 147,156 6 7/8% convertible subordinated notes due 2002, net.............................. 86,250 58,794 Other secured..................................... 23,195 17,303 ----------- ----------- 632,552 826,007 ----------- ----------- 797,861 1,085,012 ----------- ----------- Financial Services: Other liabilities.................................... 506 1,444 Notes payable to financial institutions.............. 18,188 28,497 ----------- ----------- 18,694 29,941 ----------- ----------- 816,555 1,114,953 ----------- ----------- Minority interest.................................... 3,902 3,446 ----------- ----------- STOCKHOLDERS' EQUITY Preferred stock, $.10 par value, 30,000,000 shares authorized, no shares issued.............. -- -- Common stock, $.01 par value, 100,000,000 shares authorized, 52,749,527 shares at September 30, 1997 and 55,836,733 at September 30, 1998, issued and outstanding........................... 527 558 Additional capital................................... 268,631 301,503 Retained earnings.................................... 158,708 247,375 ----------- ----------- 427,866 549,436 ----------- ----------- $ 1,248,323 $ 1,667,835 =========== ===========
See accompanying notes to consolidated financial statements 22 D.R. HORTON, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
Year Ended September 30, ------------------------------------------- 1996 1997 1998 ----------- ----------- ----------- (In thousands, except net income per share) Homebuilding: Revenues Home sales....................... $ 1,124,409 $ 1,532,691 $ 2,138,203 Land/lot sales................... 11,844 34,764 16,846 ----------- ----------- ----------- 1,136,253 1,567,455 2,155,049 Cost of sales Home sales....................... 918,152 1,259,045 1,749,743 Land/lot sales................... 11,907 33,539 15,867 ----------- ----------- ----------- 930,059 1,292,584 1,765,610 Gross profit Home sales....................... 206,257 273,646 388,460 Land/lot sales................... (63) 1,225 979 ----------- ----------- ----------- 206,194 274,871 389,439 Selling, general and administrative expense............ 116,107 163,034 216,444 Interest expense.................... 7,456 10,234 14,020 Other (income)...................... (2,414) (3,981) (4,945) ----------- ----------- ----------- 85,045 105,584 163,920 ----------- ----------- ----------- Financial Services: Revenues............................ 11,481 10,967 21,892 Selling, general and administrative expense............ 7,028 8,733 15,244 Interest expense.................... 1,785 664 2,220 Other (income)...................... (2,101) (1,396) (2,668) ----------- ----------- ----------- 4,769 2,966 7,096 ----------- ----------- ----------- Merger costs........................ -- -- 11,917 ----------- ----------- ----------- INCOME BEFORE INCOME TAXES AND EXTRAORDINARY LOSS........ 89,814 108,550 159,099 Provision for income taxes.......... 36,648 43,588 65,719 ----------- ----------- ----------- Income from continuing operations... 53,166 64,962 93,380 ----------- ----------- ----------- Extraordinary loss: Loss on extinguishment of debt, net of taxes of $4,807............ (6,918) -- -- ----------- ----------- ----------- NET INCOME.................... $ 46,248 $ 64,962 $ 93,380 =========== =========== =========== Basic earnings per common share: Income from continuing operations. $ 1.15 $ 1.28 $ 1.75 Extraordinary loss ............... (0.15) -- -- Net income ....................... $ 1.00 $ 1.28 $ 1.75 =========== =========== =========== Diluted earnings per common share: Income from continuing operations. $ 1.07 $ 1.15 $ 1.56 Extraordinary loss ............... (0.14) -- -- Net income ..................... $ 0.93 $ 1.15 $ 1.56 =========== =========== ===========
See accompanying notes to consolidated financial statements. 23 D.R. HORTON, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Total Common Additional Retained Stockholders' Stock Capital Earnings Equity ------ ---------- -------- ------------- (In thousands, except common stock share data) Balances at October 1, 1995............................ $ 411 $ 150,568 $ 65,573 $ 216,552 Net income........................................... -- -- 46,248 46,248 Stock sold through public offering (4,375,000 shares)................................ 44 43,149 -- 43,193 Exercise of stock options (277,315 shares)........... 2 1,689 -- 1,691 Issuances under D.R. Horton, Inc. employee benefit plans (29,300 shares)............................. -- 296 -- 296 Stock dividend....................................... 24 23,938 (23,963) (1) Cash dividends paid to Continental stockholders...... -- -- (1,392) (1,392) ------ ---------- -------- ------------- Balances at September 30, 1996......................... 481 219,640 86,466 306,587 Continental's net income for the period from June 1, 1996 through September 30, 1996........... -- -- 11,150 11,150 Net income........................................... -- -- 64,962 64,962 Stock sold through public offering (3,838,800 shares)................................ 37 39,909 -- 39,946 Stock issued as partial consideration for acquisition (844,444 shares)...................... 8 9,142 -- 9,150 Exercise of stock options (289,930 shares)........... 3 2,256 -- 2,259 Issuances under D.R. Horton, Inc. employee benefit plans (33,350 shares)............................. -- 310 -- 310 Repurchase of common stock........................... (2) (2,626) -- (2,628) Cash dividends paid ($.06 per share to D.R. Horton stockholders)...... -- -- (3,870) (3,870) ------ ---------- -------- ------------- Balances at September 30, 1997......................... 527 268,631 158,708 427,866 Net income........................................... -- -- 93,380 93,380 Stock issued as partial consideration for acquisition (70,249 shares)....................... 1 1,124 -- 1,125 Issuances under D.R. Horton, Inc. employee benefit plans (27,098 shares)..................... -- 483 -- 483 Exercise of stock options (374,514 shares)........... 4 4,429 -- 4,433 Conversion of convertible subordinated notes (2,586,174 shares)................................ 26 26,836 -- 26,862 Cash dividends paid ($.0875 per share to D.R. Horton stockholders).... -- -- (4,713) (4,713) ------ ---------- -------- ------------- Balances at September 30, 1998......................... $ 558 $ 301,503 $247,375 $ 549,436 ====== ========== ======== =============
See accompanying notes to consolidated financial statements 24 D.R. HORTON, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended September 30, ------------------------------ 1996 1997 1998 -------- -------- -------- (In thousands) OPERATING ACTIVITIES Net income.................................................. $ 46,248 $ 64,962 $ 93,380 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization.......................... 5,773 7,660 9,828 Extraordinary loss on extinguishment of debt........... 11,725 -- -- Expense associated with issuance of stock under employee benefit plans.............................. 229 306 999 Changes in operating assets and liabilities: Increase in inventories............................. (110,879) (171,645) (261,189) Decrease/(increase) in earnest money deposits and other assets................................. 17,996 (11,071) (17,614) Increase in mortgage loans held for sale............ (2,757) (14,789) (38,253) Increase in accounts payable and other liabilities.. 23,859 22,572 87,552 -------- -------- -------- NET CASH USED IN OPERATING ACTIVITIES....................... (7,806) (102,005) (125,297) -------- -------- -------- INVESTING ACTIVITIES Net purchase of property and equipment................. (3,248) (6,894) (11,582) Net cash paid for acquisitions......................... (2,075) (53,950) (34,035) -------- -------- -------- NET CASH USED IN INVESTING ACTIVITIES....................... (5,323) (60,844) (45,617) -------- -------- -------- FINANCING ACTIVITIES Proceeds from notes payable............................ 238,987 222,680 416,093 Repayment of notes and bonds payable................... (285,713) (242,946) (246,856) Retirement of notes and bonds payable.................. (158,563) -- -- Issuance of Convertible Subordinated Notes............. 83,279 -- -- Issuance of Senior Notes payable....................... 125,925 167,416 -- Repurchase of stock.................................... -- (2,628) -- Proceeds from common stock offerings and stock associated with certain employee benefit plans...... 43,260 39,950 483 Proceeds from exercise of stock options................ 1,690 2,117 4,433 Cash dividends paid.................................... (1,392) (3,523) (4,713) -------- -------- -------- NET CASH PROVIDED BY FINANCING ACTIVITIES................... 47,473 183,066 169,440 -------- -------- -------- INCREASE / (DECREASE) IN CASH............................... 34,344 20,217 (1,474) Cash at beginning of year.............................. 33,720 58,011 78,228 -------- -------- -------- Cash at end of year.................................... $ 68,064 $ 78,228 $ 76,754 ======== ======== ======== Supplemental cash flow information: Interest paid.......................................... $ 9,221 $ 9,915 $ 15,937 ======== ======== ======== Income taxes paid...................................... $ 32,573 $ 47,563 $ 65,863 ======== ======== ========
See accompanying notes to consolidated financial statements 25 D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business: D.R. Horton, Inc. (the Company) is a national builder that is engaged primarily in the construction and sale of single-family housing in 41 markets and 23 states in the United States. The Company designs, builds and sells single-family houses on lots developed by the Company and on finished lots which it purchases, ready for home construction. Periodically, the Company sells lots it has developed. The Company also provides title agency and mortgage brokerage services to its homebuyers. The Company does not retain or service the mortgages that it originates but, rather sells the mortgages and related servicing rights to investors. Merger: On April 20, 1998, the Company and Continental Homes Holding Corp. (Continental) consummated a merger pursuant to which Continental was merged into the Company, with 2.25 shares of the Company common shares exchanged for each outstanding share of Continental. Approximately 15,459,500 Horton common shares were issued to effect the merger. The merger with Continental was treated as a pooling of interests for accounting purposes. Therefore, all financial amounts have been presented as if Continental and the Company had been combined at the earliest period presented. Prior to the merger, Continental had a fiscal year end of May 31, and accordingly, the Continental statements of income, stockholders' equity and cash flows for the year ended May 31, 1996 have been combined with the Company's statements of income, stockholders' equity and cash flows for the fiscal year ended September 30, 1996. Continental's 1997 balance sheet and the related statements of income and cash flows have been conformed to the Company's fiscal year end of September 30, 1997. As permitted by regulations of the Securities and Exchange Commission, Continental's operations for the four-month period ended September 30, 1996 have been omitted from the statements of income, and cash flows. Continental's revenues, cost of sales, income before taxes and net income for this four month period were $234.4 million, $191.6 million, $18.8 million and $11.2 million, respectively. The results of operations for the separate companies prior to combination and the combined amounts presented in the consolidated financial statements are:
Six Months Ended Year Ended September 30, March 31, ------------------------ ---------- 1996 1997 1998 ---------- ---------- ---------- Revenue D.R. Horton, Inc................... $ 547,336 $ 837,280 $ 508,603 Continental........................ 588,917 730,175 358,910 ---------- ---------- ---------- Combined........................... $1,136,253 $1,567,455 $ 867,513 ========== ========== ========== Net income D.R. Horton, Inc................... $ 27,379 $ 36,204 $ 22,574 Continental........................ 18,869 28,758 15,242 ---------- ---------- ---------- Combined........................... $ 46,248 $ 64,962 $ 37,816 ========== ========== ========== Extraordinary loss, net D.R. Horton, Inc................... $ -- $ -- $ -- Continental........................ (6,918) -- -- ---------- ---------- ---------- Combined........................... $ (6,918) $ -- $ -- ========== ========== ==========
26 D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Principles of Consolidation: The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation. Accounting Principles: The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ materially from those estimates. Statements of Financial Accounting Standards: Statement of Financial Accounting Standards (SFAS) No. 131 "Disclosure about Segments of an Enterprise and Related Information", issued in June 1997, establishes annual and interim reporting requirements for an enterprise's operating segments and related disclosures about its products and services, geographical areas in which it operates and major customers. SFAS 131 is effective for fiscal years beginning after December 15, 1997, with earlier application permitted. Adoption of SFAS 131 is not expected to materially impact the Company. In June 1998, SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, was issued with adoption required in fiscal year 2000, when the Company plans to adopt the Statement. At the time of adoption, the Company must recognize all derivatives on the balance sheet at fair value with adjustments recorded through income in certain situations. The Company has not yet determined what the effect of SFAS 133 will be on earnings and the financial position of the Company at the time of adoption. Cash: The Company considers all highly liquid investments with an initial maturity of three months or less when purchased to be cash equivalents. Amounts in transit from title companies for home closings are included in cash. Cost of Sales: Cost of sales includes home warranty costs, purchased discounts for customer financing, and sales commissions paid to third parties. Excess of Cost Over Net Assets Acquired: The excess of amounts paid for business acquisitions over the net fair value of the assets acquired and liabilities assumed is amortized using the straight-line method over periods ranging from five to twenty five years. Additional consideration paid in subsequent periods under the terms of purchase agreements are included as acquisition costs. Amortization expense was $1,589,000, $2,296,000 and $3,427,000 in fiscal 1996, 1997 and 1998, respectively. Accumulated amortization was $9,545,000 and $11,635,000 at September 30, 1997 and 1998, respectively. Interest. The Company capitalizes interest during development and construction. Capitalized interest is charged to cost of sales as the related inventory is delivered to the home buyer. Interest costs are (in thousands):
Year Ended September 30, ------------------------------ 1996 1997 1998 -------- -------- -------- Capitalized interest, beginning of year...... $ 13,873 $ 18,004 $ 28,952 Interest incurred - homebuilding............. 37,257 50,505 68,216 Interest expensed: Directly-homebuilding...................... (7,456) (10,234) (14,020) Amortized to cost of sales................. (25,670) (29,323) (47,995) ------- ------- ------- Capitalized interest, end of year............ $ 18,004 $ 28,952 $ 35,153 ======= ======= =======
27 D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Inventories: Finished inventories are stated at the lower of accumulated cost or fair value less costs to sell. Inventories under development or held for development are stated at accumulated costs, unless such costs would not be recovered from the cash flows generated by future disposition. In this instance, such inventories are measured at fair value, less costs of disposal. Sold units are expensed on a specific identification basis as cost of sales. Included in inventories are related interest and property taxes which are capitalized in inventory during the development and construction periods. Residential lots are transferred to construction in progress when building permits are requested. Land and development costs are allocated to individual lots on a prorata basis. Earnings Per Share: The Company adopted SFAS 128, "Earnings Per Share" during fiscal 1998 and restated earnings per share amounts for all periods in conformity with the Statement. Basic earnings per share is based upon the weighted average number of shares of common stock outstanding during each year. Diluted earnings per share is based upon the weighted average number of shares of common stock outstanding during each year, adjusted for the effects of dilutive securities. The following table sets forth the computation of basic and diluted earnings per share (in thousands):
Year Ended September 30, ------------------------------ 1996 1997 1998 -------- -------- -------- Numerator: Income from continuing operations............ $ 53,166 $ 64,962 $ 93,380 Effect of dilutive securities: Interest expense associated with 6 7/8% convertible subordinated notes, net..... 2,778 3,498 3,322 -------- -------- -------- Numerator for diluted earnings per share after assumed conversions........... $ 55,944 $ 68,460 $ 96,702 ======== ======== ======== Denominator: Denominator for basic earnings per share - weighted-average shares........... 46,398 50,580 53,328 Effect of dilutive securities: 6 7/8% convertible subordinated notes................................... 5,603 8,172 7,633 Employee stock options.................... 528 568 1,125 -------- -------- -------- Denominator for diluted earnings per share - adjusted weighted average shares and assumed conversions.............................. 52,529 59,320 62,086 ======== ======== ========
Minority Interest: The Company has a joint venture arrangement on a land project whereby the Company is entitled to 55% of the profits and/or losses and is the managing partner. The financial position and results of operations of the joint venture are consolidated for financial statement purposes and the partners' equity position is disclosed as a minority interest. Property and Equipment: Property and equipment, including model home furniture, are stated on the basis of cost. Major renewals and improvements are capitalized. Repairs and maintenance are expensed as incurred. Depreciation generally is provided using the straight-line method over the estimated useful life of the asset. Accumulated depreciation was $12,847,000 and $18,944,000 as of September 30, 1997 and 1998, respectively. 28 D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Reclassifications: Certain financial statement amounts in 1996 and 1997 have been reclassified to conform with the 1998 presentation. Revenue Recognition: Revenue generally is recognized at the time of the closing of a sale, when title to and possession of the property transfer to the buyer. Mortgage loans: Mortgage loans held for sale are reported net of discounts and are stated at the lower of cost or market on an aggregate basis which approximates the fair value. Any gain or loss on the sale of loans is recognized at the time of sale. Loan origination fees, net of the related direct origination costs, are deferred as an adjustment to the carrying value of the related mortgage loans held for sale and are recognized in income upon the sale of the mortgage loans. NOTE B -- NOTES PAYABLE In June, 1998, the Company filed a universal shelf registration statement with the Securities and Exchange Commission for up to $400 million of the Company's debt and equity securities. The universal shelf registration provides that securities may be offered from time to time in one or more series and in the form of senior, senior subordinated or subordinated debt, preferred stock and/or common stock. Homebuilding: The Company has a $825 million unsecured revolving bank credit facility maturing in April, 2002, of which $50 million is reserved for use as standby letters of credit. The revolving credit facility was increased from $625 million during 1998. Borrowings bear daily interest at rates based upon federal funds or the London Interbank Offered Rate (LIBOR) plus a spread based upon the Company's ratio of debt to tangible net worth. In addition to the stated interest rates, the revolving credit facility requires the Company to pay certain fees. The weighted average interest rates of the unsecured bank debt at September 30, 1997 and 1998 were 7.2% and 6.2%, respectively. In April 1996, the Company issued $130,000,000 principal amount of 10% Senior Notes due April 15, 2006. In January 1997, the Company issued an additional $20,000,000 principal amount of its 10% Senior Notes due April 15, 2006. The 10% Senior Notes are redeemable at the option of the Company, in whole or in part, at any time on or after April 15, 2001 at redemption prices decreasing from 105%. In June, 1997 the Company issued $150 million of 8 3/8% Senior Unsecured Notes. The 8 3/8% Senior Notes, which are due June 15, 2004, with interest payable semi-annually, represent unsecured obligations of the Company. The 8 3/8% Senior Notes are not redeemable except that 35% of the amount originally issued can be redeemed with proceeds of a public equity offering by the Company at a redemption price of 108.375% through June 15, 2000. Both series of the Senior Notes are senior obligations of the Company and rank pari passu in right of payment to all existing and future unsecured indebtedness of the Company. These Notes are guaranteed by the majority of the Company subsidiaries. Upon a change of control of the Company, holders of both the 8 3/8% and 10% Senior Notes have the right to require the Company to redeem the Senior Notes at a price of 101% of the par amount, along with accrued and unpaid interest. The bank credit facilities and the Senior Notes indentures contain covenants which, taken together, limit investments in inventory, stock repurchases, cash dividends and other restricted payments, incurrence of indebtedness, asset dispositions and creation of liens, and require certain levels of tangible net worth. At September 30, 1998, these covenants limit the additional debt the Company could incur to $364.5 million. 29 D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The Company is required to comply with certain covenants contained in its bank agreements and its Senior Notes indentures. The most restrictive of these requirements allows the Company to pay cash dividends on its common stock in an amount not to exceed, on a cumulative basis, 50% of consolidated net income, as defined, subject to certain other adjustments. Pursuant to the most restrictive of these requirements, the Company had approximately $65.6 million available for the payment of dividends and for the acquisition by the Company of its common stock at September 30, 1998. The Company uses interest rate swap agreements to help manage a portion of its interest rate exposure. The agreements convert a notional amount of $300 million from a variable rate to a fixed rate. $200 million of these agreements are cancellable by a third party during periods where LIBOR exceeds 7%. The agreements expire at dates through September, 2008. The Company does not expect non-performance by the counterparty, a major U.S. bank, and any losses incurred in the event of non-performance would not be expected to be material. Net payments or receipts under the Company's interest rate swap agreements are recorded as adjustments to interest incurred. As a result of these agreements, the Company incurred additional net interest cost of $0.7 million and $0.3 million during 1997 and 1998, respectively. In November and December 1995, the Company issued $86,250,000 principal amount of 6 7/8% Convertible Subordinated Notes due November 1, 2002. The Notes are convertible at a rate of 94.73625 shares of Common Stock per $1,000 principal amount of Notes at any time prior to maturity. The Notes are redeemable in whole or in part at the option of the Company at any time on or after November 1, 1998, at redemption prices decreasing from 103.438%. The Notes are subordinated to all senior indebtedness of the Company. During fiscal 1998, conversions of these securities for common stock reduced the amount outstanding at September 30, 1998 to $58.8 million. Subsequent to September 30, 1998, essentially all the principal amount of these notes were converted by the holders to 5.6 million shares of common stock. Maturities of notes payable, excluding the convertible debt and assuming the revolving bank facility is not extended, are $16.1 million in 1999, $0.6 million in 2000, $455.2 million in 2002, $0.4 million in 2003, and $294.9 million thereafter. Financial Services: The Company has a $75 million mortgage warehouse line payable to financial institutions, secured by mortgage loans held for sale, maturing August 1999 at LIBOR + 1%. These notes payable enable the Company's wholly-owned subsidiary, CH Mortgage Company I, Ltd., to perform its loan origination and warehousing functions. 30 D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE C -- ACQUISITIONS In fiscal 1996, 1997 and 1998, the Company made the following acquisitions:
Company Acquired Date Acquired Consideration ---------------- ---------------------- --------------- Westchester Homes (Dallas)............................ June 1996 $ 9.1 million Trimark Communities, L.L.C. (Denver) and SGS Communities, Inc. (New Jersey).. October, December 1996 $ 28.8 million Torrey Group (Atlanta, Raleigh, Charlotte, Greenville S.C.)......... February 1997 $136.7 million C. Richard Dobson Builders, Inc. (Southeastern seaboard)............. February 1998 $ 75.8 million Mareli Construction and Development, L.L.C. (Louisville) and RMP Properties, Inc. (Portland)..... May, June 1998 $ 25.2 million
Consideration includes cash paid, Company stock issued, and assumption of certain accounts payable and notes payable, which were repaid subsequent to the acquisitions. Except for the Torrey Group and Dobson Builders, the above acquisitions contain provisions for additional consideration to be paid annually for up to four years subsequent to the acquisition date. The additional consideration is based upon subsequent pretax income, adjusted for a preferential return to the Company. Such additional consideration will be recorded when paid as excess of cost over net assets acquired, which is amortized using the straight line method over a period ranging from 5 to 25 years. All of the acquired companies are involved in homebuilding and land development. The Company has accounted for these acquisitions under the purchase method and has included the operations of the acquired businesses in its Consolidated Statements of Income since their acquisition. The following unaudited pro forma summaries of combined operations were prepared to illustrate the estimated effects of the 1997 acquisitions of Trimark, SGS and Torrey as if such acquisitions had occurred on the first day of the respective periods presented. Pro forma information for the 1998 acquisitions of Dobson, Mareli and RMP is not significantly different from historical results and is not presented. The pro forma information should be read in conjunction with the historical financial statements and notes thereto. The pro forma financial information is provided for comparative purposes only and is not necessarily indicative of the results which would have been obtained if the acquisitions had been effected throughout the period. The pro forma financial information is based upon the purchase method of accounting.
Year ended September 30, 1997 --------------------- (In thousands, except earnings per share) Revenues.................................................. $ 1,656,530 Income from continuing operations......................... 66,188 Net income................................................ 65,866 Basic earnings per common share: Net income from continuing operations.................. 1.30 Diluted earnings per common share: Net income from continuing operations.................. 1.17
31 D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE D -- STOCKHOLDERS' EQUITY On April 22, 1996, the Board of Directors declared an 8% common stock dividend. Since this stock dividend occurred prior to the merger with Continental, only D.R. Horton, Inc. stockholders at the time of the transaction participated in it. In June 1998, the Company filed a shelf registration statement with the Securities and Exchange Commission to issue, from time to time, up to 10 million shares of registered common stock in connection with future acquisitions. Subsequent to year end, the Board of Directors authorized the repurchase of up to $100 million each of the Company's common stock and senior debt securities, as market conditions warrant. NOTE E -- PROVISION FOR INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. These differences primarily relate to the capitalization of inventory costs, the accrual of warranty costs, and depreciation. The Company's deferred tax assets and liabilities are not significant. The difference between income tax expense and tax computed by applying the federal statutory income tax rate to income before taxes is due primarily to the effect of applicable state income taxes (4% to 6%) and, in 1998, certain non-deductible merger costs (1%). Income tax expense from continuing operations was:
Year ended September 30, -------------------------------- 1996 1997 1998 -------- -------- -------- (In thousands) Current: Federal................................. $ 35,134 $ 45,318 $ 61,897 State................................... 3,845 5,113 6,938 ------- ------- ------- 38,979 50,431 68,835 ------- ------- ------- Deferred: Federal................................. (2,117) (6,195) (2,788) State................................... (214) (648) (328) ------- ------- ------- (2,331) (6,843) (3,116) ------- ------- ------- $ 36,648 $ 43,588 $ 65,719 ======= ======= =======
NOTE F -- EMPLOYEE BENEFIT PLANS The Company has 401(k) plans for Company employees. The Company matches portions of employees' voluntary contributions. Additional employer contributions in the form of profit sharing are at the discretion of the Company. Expenses for these Plans were $1,023,000, $1,200,000 and $1,977,000 for 1996, 1997 and 1998, respectively. 32 D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The Company's Supplemental Executive Retirement Plans (SERP's) are non-qualified deferred compensation programs that provide benefits payable to certain management employees upon retirement, death, or termination of employment with the Company. Under one SERP, the Company accrues an unfunded benefit, as well as an interest factor based upon a predetermined formula. The Company recorded $313,000, $543,000 and $573,000 of expense for this plan in 1996, 1997 and 1998, respectively. Effective January 1, 1994, the Company adopted the D.R. Horton, Inc. Stock Tenure Plan (an Employee Stock Ownership Plan), covering those employees generally not participating in the stock option or SERP benefit plans. Contributions are made at the discretion of the Company. Expenses related to Company contributions of common stock to the Plan of $229,000, $309,000 and $999,000 were recognized for 1996, 1997 and 1998, respectively. The Company Stock Incentive Plans provide for the granting of stock options to certain key employees of the Company to purchase shares of common stock. Options are granted at exercise prices which approximate the market value of the Company's common stock at the date of the grant. Options generally expire 10 years after the dates on which they were granted. Options vest over periods of 3 to 10 years. There were 264,007 and 635,848 shares available for future grants under the Plans at September 30, 1997 and 1998, respectively. Activity under the plan is:
1996 1997 1998 ------------------- ------------------- ------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Options Prices Options Prices Options Prices --------- -------- --------- -------- --------- -------- Stock Options Outstanding at be- ginning of year.. 2,332,946 $ 6.31 2,825,501 $ 7.09 3,544,295 $ 8.16 Transitional period........... 126,234 -- -- -- -- -- Granted........... 637,750 9.90 1,106,500 10.05 1,075,000 22.06 Exercised......... (277,315) 3.57 (268,904) 4.30 (388,857) 6.46 Cancelled......... (140,022) 8.36 (118,802) 8.54 (112,824) 7.83 Effects of stock dividends........ 145,908 6.69 -- -- -- -- ------- ----- --------- ----- --------- ----- Outstanding at end of year...... 2,825,501 $ 7.09 3,544,295 $ 8.16 4,747,614 $13.30 ========= ===== ========= ===== ========= ===== Exercisable at end of year...... 887,079 $ 4.99 961,718 $ 5.98 968,608 $ 6.80 ========= ===== ========= ===== ========= =====
Exercise prices for options outstanding at September 30, 1998, ranged from $1.804 to $22.6875. 33 D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The weighted average remaining contractual lives of those options are:
Outstanding Exercisable ------------------------------ ----------------------------- Weighted Weighted Weighted Weighted Average Average Average Average Exercise Price Exercise Maturity Exercise Maturity Range Options Price (Years) Options Price (Years) - --------------- --------- -------- -------- --------- -------- -------- Less than $9... 1,371,937 $ 6.21 5.4 702,056 $ 5.59 4.8 $9 - $18....... 1,690,677 10.25 8.0 266,552 9.99 7.4 More than $18.. 1,685,000 22.12 9.8 -- -- -- --------- ----- ---- ------- ----- ---- Total........ 4,747,614 $13.30 7.9 968,608 $ 6.80 5.5 ========= ===== ==== ======= ===== ====
The Company has elected to follow Accounting Principles Board Opinion No. 25, in accounting for its employee stock options. The exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, and therefore no compensation expense is recognized. SFAS No. 123 requires disclosure of pro forma income and pro forma income per share as if the fair value based method had been applied in measuring compensation expense for option awards granted in fiscal 1996, 1997 and 1998. Management believes the fiscal 1996, 1997 and 1998 pro forma amounts may not be representative of the effects of option awards on future pro forma net income and pro forma net income per share because options granted before 1996 are not considered in these calculations. Application of the fair value method, as specified by SFAS 123, would decrease net income by $118,000 ($0.01 per diluted share), $398,000 ($0.01 per diluted share) and $815,000 ($0.01 per diluted share) in 1996, 1997 and 1998, respectively. The weighted average fair value of grants made in 1998 was $10.09. The fair values of the options granted were estimated on the date of their grant using the Black-Scholes option pricing model based on the following weighted average assumptions:
1997 1998 -------- -------- Risk free interest rate............................... 6.16% 4.82% Expected life (in years).............................. 6.7 7.0 Expected volatility................................... 34.69% 36.71% Expected dividend yield............................... .59% .38%
NOTE G -- FINANCIAL INSTRUMENTS The fair values of the Company's financial instruments are based on quoted market prices, where available, or are estimated. Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instrument. These estimates are subjective in nature, involve matters of judgment and therefore, cannot be determined with precision. Estimated fair values are significantly affected by the assumptions used. 34 D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The table below sets for the carrying values and estimated fair values of the Company's financial instruments (in thousands).
1997 1998 -------------------- -------------------- Carrying Estimated Carrying Estimated Value Fair Value Value Fair Value -------- ---------- -------- ---------- HOMEBUILDING: Liabilities 8 3/8% Senior notes............. $147,370 $151,500 $147,754 $147,375 10% Senior notes................ 148,462 159,000 147,156 154,467 6 7/8% Convertible subordinated notes........................ 86,250 101,775 58,794 89,119 Off-balance sheet financial instruments Interest rate swaps............. -0- 1,914 -0- (422) FINANCIAL SERVICES: Assets Mortgage loans held for sale.... 34,072 34,806 72,261 73,013
The Company used the following methods and assumptions in estimating fair values: For cash and cash equivalents, the revolving credit facility, other notes payable, and standby letters of credit the carrying amounts reported in the balance sheet approximate fair values due to their short maturity or floating interest rate terms, as applicable. For senior notes, convertible subordinated notes, mortgage loans held for sale, interest rate swaps and mortgage loans held for sale, the fair values of these financial instruments are estimated based on quoted market prices for similar financial instruments. NOTE H -- COMMITMENTS AND CONTINGENCIES The Company is involved in lawsuits and other contingencies in the ordinary course of business. Management believes that, while the ultimate outcome of the contingencies cannot be predicted with certainty, the ultimate liability, if any, will not have a material adverse effect on the Company's financial position. In the ordinary course of business, the Company enters into option agreements to purchase land and developed lots. At September 30, 1998, cash deposits of approximately $16.4 million and promissory notes approximating $2.3 million secured the Company's performance under these agreements. Additionally, in the normal course of its business activities, the Company provides standby letters of credit and performance bonds, issued by third parties, to secure performance under various contracts. At September 30, 1998, outstanding standby letters of credit were $19.8 million and performance bonds were $140.1 million. The Company has an additional capacity of $30.2 million for standby letters of credit under its revolving credit facility. 35 D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The Company leases office space under noncancelable operating leases. Minimum annual lease payments under these leases at September 30, 1998 approximate:
(In thousands) 1999......................................... $ 2,607 2000......................................... 2,230 2001......................................... 1,529 2002......................................... 997 2003......................................... 730 Thereafter................................... 1,440 --------- $ 9,533 =========
Rent expense approximated $2,594,000, $3,177,000 and $4,674,000 for 1996, 1997 and 1998, respectively. NOTE I -- SUMMARIZED FINANCIAL INFORMATION The 8 3/8% and the 10% Senior Notes are fully and unconditionally guaranteed, on a joint and several basis, by all of the Company's direct and indirect subsidiaries other than certain inconsequential subsidiaries. Each of the guarantors is a wholly-owned subsidiary of the Company. Summarized financial information of the Company and its subsidiaries is presented below. Separate financial statements and other disclosures concerning the guarantor subsidiaries are not presented because management has determined that they are not material to investors. As of and for the periods ended (in thousands):
September 30, 1998 D.R. Horton, Guarantor Nonguarantor Intercompany Inc. Subsidiaries Subsidiaries Eliminations Total ------------ ------------ ------------ ------------ ---------- Total assets...... $1,169,347 $1,548,554 $ 119,769 $(1,169,835) $1,667,835 Total liabilities. 906,014 1,272,398 101,121 (1,161,134) 1,118,399 Revenues.......... 362,847 1,777,833 36,261 -- 2,176,941 Gross profit...... 44,553 342,300 2,586 -- 389,439 Net income........ 2,140 88,128 3,112 -- 93,380 September 30, 1997 D.R. Horton, Guarantor Nonguarantor Intercompany Inc. Subsidiaries Subsidiaries Eliminations Total ------------ ------------ ------------ ------------ ---------- Total assets...... $ 620,636 $ 934,497 $ 66,666 $ (373,476) $1,248,323 Total liabilities. 396,853 751,672 44,573 (372,641) 820,457 Revenues.......... 286,568 1,269,391 22,463 -- 1,578,422 Gross profit...... 51,484 222,040 1,347 -- 274,871 Net income........ 4,248 59,373 1,341 -- 64,962 September 30, 1996 D.R. Horton, Guarantor Nonguarantor Intercompany Inc. Subsidiaries Subsidiaries Eliminations Total ------------ ------------ ------------ ------------ ---------- Total assets...... $ 353,363 $ 598,441 $ 30,513 $ (140,970) $ 841,347 Total liabilities. 197,055 464,004 8,999 (140,095) 529,963 Revenues.......... 269,853 866,400 11,481 -- 1,147,734 Gross profit...... 47,346 158,873 (25) -- 206,194 Net income........ 4,747 38,715 2,786 -- 46,248
36 D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE J -- QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) Quarterly results of operations are (in thousands, except for per share amounts):
1998 -------------------------------------------------- Three Months Ended -------------------------------------------------- September 30 June 30 March 31 December 31 ------------- --------- ---------- ------------ Revenues.................... $686,921 $613,864 $452,959 $423,197 Gross margin................ 123,699 109,208 80,413 76,119 Net income.................. 32,476 23,088 19,492 18,324 Net income per common share. 0.59 0.44 0.37 0.35 Diluted net income per common share.............. 0.53 0.39 0.33 0.31 1997 -------------------------------------------------- Three Months Ended -------------------------------------------------- September 30 June 30 March 31 December 31 ------------- --------- ---------- ------------ Revenues.................... $480,868 $437,631 $326,190 $333,733 Gross margin................ 86,188 72,940 56,871 58,872 Net income.................. 21,750 15,623 12,184 15,405 Net income per share........ 0.41 0.30 0.25 0.32 Diluted net income per common share.............. 0.37 0.27 0.23 0.29
37 D.R. HORTON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item is set forth under the caption "Election of Directors" at pages 2 through 5, and the caption "Section 16(a) Beneficial Ownership Reporting Compliance" at page 16, of the registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on January 15, 1999 and incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is set forth under the caption "Executive Compensation" at page 8 through "Compensation Committee Interlocks and Insider Participation" at page 11 of the registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on January 15, 1999 and incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is set forth under the caption "Beneficial Ownership of Common Stock" at pages 6 and 7 of the registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on January 15, 1999 and incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is set forth under the caption "Executive Compensation--Transactions with Management" at pages 10 and 11 of the registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on January 15, 1999 and incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report: 1. Financial Statements: See Item 8 above. 2. Financial Statement Schedules: Schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission (the "Commission") are not required under the related instructions or are not applicable, and therefore have been omitted. 38 3. Exhibits: Exhibit Number Exhibit - ------- ------- 2.1 -- Agreement and Plan of Merger, dated as of December 18, 1997, by and between the Registrant and Continental Homes Holding Corp. The Registrant agrees to furnish supplementally a copy of omitted schedules to the Commission upon request (1) 3.1 -- Amended and Restated Certificate of Incorporation, as amended (2) 3.2 -- Amended and Restated Bylaws (3) 4.1 -- See Exhibits 3.1 and 3.2 4.2 -- Indenture, dated as of June 9, 1997, among the Registrant, the guarantors named therein and American Stock Transfer & Trust Company, as Trustee (4) 4.3 -- First Supplemental Indenture, dated as of June 9, 1997, among the the Registrant, the guarantors named therein and American Stock Transfer & Trust Company, as Trustee (5) 4.4 -- Second Supplemental Indenture, dated as of September 30, 1997, among the Registrant, the guarantors named therein and American Stock Transfer & Trust Company, as Trustee (6) 4.5 -- Third Supplemental Indenture, dated as of April 17, 1998, among the Registrant, the guarantors named therein and American Stock Transfer & Trust Company, as Trustee (7) 4.6 -- Fourth Supplemental Indenture, dated as of April 20, 1998, among the Registrant, the guarantors named therein and American Stock Transfer & Trust Company, as Trustee (8) 4.7 -- Fifth Supplemental Indenture, dated as of August 31, 1998, among the Registrant, the guarantors named therein and American Stock Transfer & Trust Company, as Trustee (9) 4.8 -- Indenture dated as of April 15, 1996 between Continental and First Union National Bank, as Trustee (10) 4.9 -- First Supplemental Indenture, dated as of April 20, 1998, among the Registrant, the guarantors named therein and First Union National Bank, as Trustee (11) 4.10 -- Second Supplemental Indenture, dated as of August 31, 1998, among the Registrant, the guarantors named therein and First Union National Bank, as Trustee (9) 4.11 -- Indenture dated as of November 1, 1995 between Continental and Manufacturers and Traders Trust Company, as Trustee (12) 4.12 -- First Supplemental Indenture, dated as of April 20, 1998, between the Registrant and Manufacturers and Traders Trust Company, as Trustee (13) 10.1 -- Form of Indemnification Agreement between the Registrant and each of its directors and executive officers and schedules of substantially identical documents (14) 10.2 -- D.R. Horton, Inc. 1991 Stock Incentive Plan (15)(16) 10.2a -- Amendment No. 1 to 1991 Stock Incentive Plan (15)(16) 10.2b -- Amendment No. 2 to 1991 Stock Incentive Plan (15)(16) 10.2c -- Amendment No. 3 to 1991 Stock Incentive Plan (16)(17) 10.2d -- Amendment No. 4 to 1991 Stock Incentive Plan (16)(17) 10.2e -- Amendment No. 5 to 1991 Stock Incentive Plan (16)(18) 10.2f -- Amendment No. 6 to 1991 Stock Incentive Plan(16)(19) 10.3 -- Form of Non-Qualified Stock Option Agreement (Term Vesting)(20) 10.4 -- Form of Non-Qualified Stock Option Agreement (Performance Vesting) (21) 39 Exhibit Number Exhibit - ------- ------- 10.5 -- Form of Incentive Stock Option (Term Vesting)(21) 10.6 -- Form of Incentive Stock Option (Performance Vesting)(21) 10.7 -- Form of Restricted Stock Agreement (Term Vesting)(21) 10.8 -- Form of Restricted Stock Agreement (Performance Vesting)(21) 10.9 -- Form of Stock Appreciation Right Agreement (Term Vesting)(21) 10.10 -- Form of Stock Appreciation Right Agreement (Performance Vesting) (21) 10.11 -- Form of Stock Appreciation Right Notification (Tandem)(21) 10.12 -- Form of Performance Share Notification (21) 10.13 -- Form of Performance Unit Notification (21) 10.14 -- D.R. Horton, Inc. Supplemental Executive Retirement Plan No. 1(16) (22) 10.15 -- D.R. Horton, Inc. Supplemental Executive Retirement Trust No. 1(16) (22) 10.16 -- D.R. Horton, Inc. Supplemental Executive Retirement Plan No. 2(16) (22) 10.17 -- Continental Homes Holding Corp. 1988 Stock Incentive Plan (as amended and restated June 20, 1997)(16)(23) 10.18 -- Restated Continental Homes Holding Corp. 1986 Stock Incentive Plan, and the First Amendment thereto dated June 17, 1987(16)(24) 10.19 -- Form of Stock Option Agreement pursuant to Continental's 1986 and 1988 Stock Incentive Plans (25) 10.20 -- Employment Agreement dated as of December 1, 1997 between Continental and W. Thomas Hickcox(9)(16) 10.20a -- Amendment No. 1 to Employment Agreement and Non - Competition Agreement, dated December 18, 1997 between the Registrant and W. Thomas Hickcox(16)(26) 10.21 -- Master Loan and Inter-Creditor Agreement dated as of April 21, 1998, among D.R. Horton, Inc., as a Borrower; NationsBank, N.A., Bank of America National Trust and Savings Association, Fleet National Bank, Bank United, Comerica Bank, Credit Lyonnais New York Branch, Soci t G n rale, Southwest Agency, The First National Bank of Chicago, PNC Bank, National Association, Amsouth Bank, Bank One, Arizona, NA, First American Bank Texas, SSB, Harris Trust and Savings Bank, Sanwa Bank California, Norwest Bank Arizona, National Association and Summit Bank, as Banks; and NationsBank, N.A., as Administrative Agent (27) 21.1 -- Subsidiaries of D.R. Horton, Inc. (9) 23.1 -- Consent of Ernst & Young LLP, Fort Worth, Texas (9) 23.2 -- Consent of Arthur Andersen LLP, Phoenix, Arizona (9) 27 -- Financial Data Schedule for year ended September 30, 1998 (9) 99.1 -- Continental Homes Holding Corp. May 31, 1996 statements of income, stockholders' equity and cash flows, with Report of Independent Auditors, Arthur Andersen LLP (9) - ---------- (1) Incorporated by reference from Exhibit 2.1 to the Registrant's Registration Statement on Form S-4 (Registration No. 333-44279), filed with the Commission on January 15, 1998. (2) Incorporated by reference from Exhibit 3.1 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1995, filed with the Commission on November 22, 1995. (3) Incorporated by reference from Exhibit 3.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997, filed with the Commission on May 14, 1997. (4) Incorporated by reference from Exhibit 4.1(a) to the Registrant's Registration Statement on Form S-3 (No. 333-27521), filed with the Commission on May 21, 1997. 40 (5) Incorporated by reference from Exhibit 4.1 to the Registrant's Form 8-K/A dated April 1, 1997, filed with the Commission on June 6, 1997. (6) Incorporated by reference from Exhibit 4.4 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1997, filed with the Commission on December 8, 1997. (7) Incorporated by reference from Exhibit 4.3 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998, filed with Commission on May 14, 1998. (8) Incorporated by reference from Exhibit 4.4 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998, filed with Commission on May 14, 1998. (9) Filed herewith. (10) Incorporated herein by reference from Exhibit 4.1 to Continental's Annual Report on Form 10-K for the year ended May 31, 1996. The Commission file number for Continental is 1-10700. (11) Incorporated by reference from Exhibit 4.5 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998, filed with Commission on May 14, 1998. (12) Incorporated by reference from Exhibit 4.1 to Continental's Quarterly Report on Form 10-Q for the quarter ended November 30, 1995. The Commission file number for Continental is 1-10700. (13) Incorporated by reference from Exhibit 4.6 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998, filed with Commission on May 14, 1998. (14) Incorporated by reference from Exhibit 10.1 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1995, filed with the Commission on November 22, 1995; and Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, filed with the Commission on August 6, 1998. (15) Incorporated by reference from the Registrant's Registration Statement on Form S-1 (No. 33-46554) declared effective by the Commission on June 4, 1992. (16) Management contract or compensatory plan arrangement. (17) Incorporated by reference from the Registrant's Annual Report Form 10-K for the fiscal year ended September 30, 1994, filed with the Commission on December 9, 1994. (18) Incorporated by reference from Exhibit 10.2e to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1995, filed with the Commission on November 22, 1995. (19) Incorporated by reference from Exhibit 10.2f to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1997, filed with the Commission on December 8, 1997. (20) Incorporated by reference from Exhibit 10.3 to the Registrant's Registration Statement on Form S-1 (Registration No. 3-81856), filed with the Commission on July 22, 1994. (21) Incorporated by reference from the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1992, filed with the Commission on March 29, 1993. (22) Incorporated by reference from the Registrant's Transitional Report on Form 10-K for the period from January 1, 1993 to September 30, 1993, filed with the Commission on December 28, 1993. (23) Incorporated by reference from Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, filed with the Commission on August 6, 1998. (24) Incorporated by reference from Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, filed with the Commission on August 6, 1998. (25) Incorporated by reference from Exhibit 10.5 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, filed with the Commission on August 6, 1998. (26) Incorporated by reference from Exhibit 10.3 to the Registrant's Registration Statement on Form S-4 (Registration No. 333-44279), filed with the Commission on January 15, 1998. (27) Incorporated by reference from Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, filed with the Commission on August 6, 1998. (b) The following reports were filed on Form 8-K by the Registrant during the quarter ended September 30, 1998. 1. On September 23, 1998, the Registrant filed a Current Report on Form 8-K, dated September 23, 1998 (Item 5), which gave notice that on November 1, 1998, the Registrant would redeem all of its outstanding 6 7/8% Convertible Subordinated Notes, due 2002. 41 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: December 10, 1998 D.R. HORTON, INC. By: /s/ Donald R. Horton ------------------------ Donald R. Horton, Chairman of the Board Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date /s/ DONALD R. HORTON Chairman of the Board December 10, 1998 - -------------------------- (Principal Executive Officer) Donald R. Horton /s/ BRADLEY S. ANDERSON Director December 10, 1998 - -------------------------- Bradley S. Anderson /s/ RICHARD BECKWITT Director December 10, 1998 - -------------------------- Richard Beckwitt /s/ RICHARD I. GALLAND Director December 10, 1998 - -------------------------- Richard I. Galland Director - -------------------------- Thomas Hickcox /s/ RICHARD L. HORTON Director December 10, 1998 - -------------------------- Richard L. Horton /s/ TERRILL J. HORTON Director December 10, 1998 - -------------------------- Terrill J. Horton /s/ DAVID J. KELLER Treasurer, Chief Financial December 10, 1998 - -------------------------- Officer and Director David J. Keller (Principal Financial Officer and Principal Accounting Officer) /s/ FRANCINE I. NEFF Director December 10, 1998 - -------------------------- Francine I. Neff /s/ SCOTT J. STONE Director December 10, 1998 - -------------------------- Scott J. Stone /s/ DONALD J. TOMNITZ Vice Chairman, Chief December 10, 1998 - -------------------------- Executive Officer, and Donald J. Tomnitz Director
42 CORPORATE INFORMATION D.R. Horton, Inc. (the "Company") is engaged primarily in the construction and sale of single-family homes. The Company offers high-quality homes with custom features, designed principally for the entry-level and move-up segments. Horton has established a unique marketing niche, offering a broader selection of homes that typically have more amenities and greater design flexibility than homes offered by volume builders, at prices that are generally more affordable than those charged by local custom builders. Horton homes range in size from 1,000 to 5,000 square feet and are priced from $80,000 to $600,000. For the year ended September 30, 1998, the Company closed 13,944 homes with an average sales price of approximately $153,300. The Company is geographically diversified, operating in 23 states and 41 markets. Plans call for continued expansion in current markets, as well as entry into new markets that have significant entry-level and move-up market segments consistent with the Company's product and pricing strategy. THE BOARD OF DIRECTORS Transfer Agent and Registrar Donald R. Horton American Stock Transfer & Trust Co. Chairman (2) New York, NY (800)937-5449 Bradley S. Anderson First Vice President of Investor Relations CB Richard Ellis, Inc. (1) Richard Beckwitt Richard Beckwitt D.R. Horton, Inc. President (2) 1901 Ascension Blvd., Suite 100 Arlington, Texas 76006 Richard I. Galland Former Chief Executive Officer and Annual Meeting Chairman of Fina, Inc. (1)(2) January 15, 1999 9:30 a.m. C.S.T. Richard L. Horton Former Vice President - At the Corporate Offices of Dallas/Fort Worth East Division D.R. Horton, Inc. 1901 Ascension Blvd., Suite 100 Terrill J. Horton Arlington, Texas 76006 Former Vice President - Dallas/Fort Worth North Division David J. Keller Executive Vice President, Treasurer and Chief Financial Officer (2) Francine I. Neff Former Treasurer of the United States (1) Scott J. Stone Former Vice President - Eastern Region Donald J. Tomnitz Vice Chairman and Chief Executive Officer (2) - ---------- (1) Audit Committee Member (2) Compensation Committee Member 43 EX-4.7 2 FIFTH SUPPLEMENTAL INDENTURE - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- EXHIBIT 4.7 D.R. HORTON, INC. AND THE GUARANTORS PARTY HERETO AND AMERICAN STOCK TRANSFER & TRUST COMPANY, as Trustee ------------------ FIFTH SUPPLEMENTAL INDENTURE Dated as of August 31, 1998 ------------------ 8 3/8% SENIOR NOTES DUE 2004 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- FIFTH SUPPLEMENTAL INDENTURE, dated as of August 31, 1998, and effective as of the dates set forth in Articles I and II below, to the Indenture, dated as of June 9, 1997 (as amended, modified or supplemented from time to time in accordance therewith, the "Indenture"), by and among D.R. HORTON, INC., a Delaware corporation (the "Company"), the ADDITIONAL GUARANTORS (as defined herein), the EXISTING GUARANTORS (as defined herein) and AMERICAN STOCK TRANSFER & TRUST COMPANY, as trustee (the "Trustee"). RECITALS WHEREAS, the Company and the Trustee entered into the Indenture to provide for the issuance from time to time of senior debt securities (the "Securities") to be issued in one or more series as the Indenture provides; WHEREAS, pursuant to the First Supplemental Indenture dated as of June 9, 1997 (the "First Supplemental Indenture"), among the Company, the guarantors party thereto (with the guarantors party to subsequent supplemental indentures, the "Existing Guarantors") and the Trustee, the Company issued a series of Securities designated as its 8 3/8% Senior Notes due 2004 in the aggregate principal amount of up to $250,000,000 (the "Notes"); WHEREAS, pursuant to Section 4.05 of the Indenture, if the Company organizes, acquires or otherwise invests in another Subsidiary which becomes a Restricted Subsidiary, then such Subsidiary shall execute and deliver a supplemental indenture pursuant to which such Restricted Subsidiary shall unconditionally guarantee all of the Company's obligations under the Notes on the terms set forth in the Indenture; WHEREAS, in accordance with Section 4.05 of the Indenture, the Company desires to cause certain newly organized or acquired Subsidiaries who are deemed to be Restricted Subsidiaries according to the Indenture to be bound by those terms applicable to a Guarantor under the Indenture (as it applies to the Securities); WHEREAS, pursuant to Section 9.05 of the Indenture, a Guarantor may merge with or into, or dissolve into, another Restricted Subsidiary and, upon such merger or dissolution, the Guarantee given by such Guarantor shall no longer have any force or effect; WHEREAS, in accordance with Section 9.05 of the Indenture, the Company has caused certain Guarantors to merge with and into, or have all their property conveyed to, certain Restricted Subsidiaries (the "Merged Guarantors"), whereupon the Guarantees given by such Guarantors shall no longer have any force or effect; WHEREAS, the execution of this Fifth Supplemental Indenture has been duly authorized by the Boards of Directors of the Company and the Additional Guarantors and all things necessary to make this Fifth Supplemental Indenture a -1- valid, binding and legal instrument according to its terms have been done and performed; NOW THEREFORE, for and in consideration of the premises, the Company, the Additional Guarantors and the Existing Guarantors covenant and agree with the Trustee for the equal and ratable benefit of the respective holders of the Securities as follows: ARTICLE I. ADDITIONAL GUARANTOR 1.1. As of May 1, 1998, and August 28, 1998, respectively, the respective dates of their organization, and in accordance with Section 4.05 of the Indenture, the following Restricted Subsidiaries (the "Additional Guarantors") hereby unconditionally guarantee all of the Company's obligations under the Securities of any Series that has the benefit of Guarantees of other Subsidiaries of the Company and the Indenture (as it relates to all such Series) on the terms set forth in the Indenture, including without limitation, Article Nine thereof, and, in the case of the Notes, Article One of the First Supplemental Indenture thereto and the Guarantees affixed thereto: Name Jurisdiction of Organization D.R. Horton, Inc. - Portland Delaware Magnolia Homes Builders, Inc. Georgia 1.2 The Trustee is hereby authorized to add the above-named Additional Guarantors to the list of Guarantors on the Guarantees affixed to the Notes. ARTICLE II. MERGED GUARANTORS 2.1 In accordance with Section 9.05 of the Indenture, the Company and the Trustee acknowledge that the Guarantees previously given by the following Merged Guarantors no longer have any force or effect by reason of the merger or dissolution of the Merged Guarantors into the Restricted Subsidiaries as indicated below: (a) DRH New Mexico Construction, Inc. merged into D.R. Horton, Inc. - Albuquerque, as of April 30, 1998, and the name of D.R. Horton, Inc. - Albuquerque was changed to D.R. Horton, Inc. - Louisville. (b) The name of Continental Homes of Austin, L.P., was changed to Continental Homes of Texas, L.P. and Continental Homes of Dallas, L.P. and Continental -2- Homes of San Antonio, L.P. merged into Continental Homes of Texas, L.P. as of July 31, 1998. (c) SGS Communities at West Windsor, LLC dissolved as of July 31, 1998, and its assets were distributed to Meadows IX, Inc. ARTICLE III. MISCELLANEOUS PROVISIONS 3.1 This Fifth Supplemental Indenture constitutes a supplement to the Indenture, and the Indenture, the First Supplement Indenture, the Second Supplemental Indenture, dated as of September 30, 1997, Third Supplemental Indenture, dated as of April 17, 1998, and Fourth Supplemental Indenture, dated as of April 20, 1998, by and among the Company, the guarantors thereto and the Trustee, shall be read together and shall have the effect so far as practicable as though all of the provisions thereof and hereof are contained in one instrument. 3.2 The parties may sign any number of copies of this Fifth Supplemental Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. 3.3 In case any one or more of the provisions contained in this Fifth Supplemental Indenture or in the Notes shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provisions of this Fifth Supplemental Indenture or of the Notes. 3.4 The article and section headings herein are for convenience only and shall not affect the construction hereof. 3.5 Any capitalized term used in this Fifth Supplemental Indenture and not defined herein that is defined in the Indenture shall have the meaning specified in the Indenture, unless the context shall otherwise require. 3.6 All covenants and agreements in this Fifth Supplemental Indenture by the Company, the Existing Guarantors and the Additional Guarantors shall bind each of their successors and assigns, whether so expressed or not. All agreements of the Trustee in this Fifth Supplemental Indenture shall bind its successors and assigns. 3.7 The laws of the State of New York shall govern this Fifth Supplemental Indenture, the Securities of each Series and the Guarantees. 3.8 Except as amended by this Fifth Supplemental Indenture, the terms and provisions of the Indenture shall remain in full force and effect. -3- 3.9 This Fifth Supplemental Indenture may not be used to interpret another indenture, loan or debt agreement of the Company or a Subsidiary. Any such indenture, loan or debt agreement may not be used to interpret this Fifth Supplemental Indenture. 3.10 All liability described in paragraph 12 of the Notes of any director, officer, employee or stockholder, as such, of the Company is waived and released. 3.11 The Trustee accepts the modifications of the trust effected by this Fifth Supplemental Indenture, but only upon the terms and conditions set forth in the Indenture. Without limiting the generality of the foregoing, the Trustee assumes no responsibility for the correctness of the recitals herein contained which shall be taken as the statements of the Company and the Additional Guarantors, and the Trustee shall not be responsible or accountable in any way whatsoever for or with respect to the validity or execution or sufficiency of this Fifth Supplemental Indenture, and the Trustee makes no representation with respect thereto. IN WITNESS WHEREOF, the parties hereto have caused this Supplemental Indenture to be duly executed, all as of the day and year first above written. D.R. HORTON, INC. By: /s/ David J. Keller --------------------------------- David J. Keller Executive Vice President, Chief Financial Officer and Treasurer ADDITIONAL GUARANTORS: D.R. Horton, Inc. - Portland Magnolia Homes Builders, Inc. By: /s/ David J. Keller --------------------------------- David J. Keller, Treasurer -4- EXISTING GUARANTORS: DRHI, Inc. Meadows I, Ltd. Meadows II, Ltd. Meadows IX, Inc. Meadows X, Inc. D.R. Horton, Inc. - Minnesota D.R. Horton, Inc. - Greensboro D.R. Horton, Inc. - Birmingham D.R. Horton, Inc. - New Jersey D.R. Horton, Inc. - Torrey DRH Construction, Inc. D.R. Horton, Inc. - Louisville D.R. Horton, Inc. - Denver D.R. Horton Denver Management Company, Inc. D.R. Horton San Diego Holding Company, Inc. D.R. Horton San Diego Management Company, Inc. D.R. Horton Los Angeles Holding Company, Inc. D.R. Horton Los Angeles Management Company, Inc. S. G. Torrey Atlanta, Ltd. D.R. Horton, Inc. - Sacramento D.R. Horton Sacramento Management Company, Inc. C. Richard Dobson Builders, Inc. Land Development, Inc. DRH Tucson Construction, Inc. Continental Homes, Inc. KDB Homes, Inc. L&W Investments, Inc. Continental Ranch, Inc. Continental Homes of Florida, Inc. CHI Construction Company CHTEX of Texas, Inc. CH Investments of Texas, Inc. By: /s/ David J. Keller --------------------------------- David J. Keller, Treasurer -5- SGS COMMUNITIES AT GRANDE QUAY, LLC By Meadows IX, Inc., a member By: /s/ Donald R. Horton -------------------------------- Donald R. Horton Chairman of the Board and By Meadows X, Inc., a member By: /s/ Donald R. Horton -------------------------------- Donald R. Horton Chairman of the Board D.R. HORTON MANAGEMENT COMPANY, LTD. D.R. HORTON - TEXAS, LTD. By Meadows I, Ltd., its general partner By: /s/ Donald R. Horton -------------------------------- Donald R. Horton Chairman of the Board CONTINENTAL HOMES OF TEXAS, L.P. By CHTEX of Texas, Inc. Its: General Partner By: /s/ David J. Keller -------------------------------- David J. Keller, Treasurer AMERICAN STOCK TRANSFER & TRUST COMPANY, as Trustee By: /s/ Herbert J. Lemmer -------------------------------- Name: Herbert J. Lemmer Title: Vice President -6- EX-4.10 3 SECOND SUPPLEMENTAL INDENTURE - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- EXHIBIT 4.10 D.R. HORTON, INC. AND THE GUARANTORS PARTY HERETO AND FIRST UNION NATIONAL BANK, as Trustee ------------------ SECOND SUPPLEMENTAL INDENTURE Dated as of August 31, 1998 ------------------ 10% SENIOR NOTES DUE 2006 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECOND SUPPLEMENTAL INDENTURE, dated as of August 31, 1998, and effective as of the dates set forth in Articles I and II below, to the Indenture, dated as of April 15, 1996 (as amended, modified or supplemented from time to time in accordance therewith, the "Indenture"), by and among D.R. HORTON, INC., a Delaware corporation (the "Company"), the ADDITIONAL GUARANTORS (as defined herein), the EXISTING GUARANTORS (as defined herein) and FIRST UNION NATIONAL BANK, a national banking association organized and existing under the laws of the United States of America, as trustee (the "Trustee"). RECITALS WHEREAS, Continental Homes Holding Corp., a Delaware corporation ("Continental"), and the Trustee entered into the Indenture pursuant to which Continental issued $150,000,000 principal amount of 10% Senior Notes due 2006 (the "Securities"); WHEREAS, on April 20, 1998, pursuant to the laws of the State of Delaware and in accordance with the terms of the Agreement and Plan of Merger, dated as of December 18, 1998, by and between the Company and Continental, Continental was duly merged with and into the Company (the "Merger"), with the Company continuing as the surviving corporation; WHEREAS, as a result of the Merger, the Company succeeded to all obligations, duties and liabilities of Continental under the Indenture as if incurred or contracted by the Company; WHEREAS, pursuant to Section 4.16 of the Indenture, the Company is required to cause any Subsidiary with a net book value greater than $10,000,000 which is a Restricted Subsidiary to guarantee, simultaneously with its designation as a Restricted Subsidiary, the payment of the Securities pursuant to the terms of Article 10 and Exhibit B of the Indenture; WHEREAS, in accordance with Section 4.16 of the Indenture, the Company desires to cause certain newly organized or acquired Subsidiaries who are deemed to be Restricted Subsidiaries according to the Indenture to guarantee the payment of the Securities; WHEREAS, pursuant to Section 10.04 of the Indenture, a Guarantor may merge with or into, or dissolve into, another Restricted Subsidiary and, upon such merger or dissolution, the Guarantee given by such Guarantor shall no longer have any force or effect; WHEREAS, in accordance with Section 10.04 of the Indenture, the Company has caused certain Guarantors to merge with and into, or have all their property conveyed to, certain Restricted Subsidiaries (the "Merged Guarantors"), whereupon the Guarantees given by such Guarantors shall no longer have any force or effect; WHEREAS, the execution of this Second Supplemental Indenture has been duly authorized by the Boards of Directors of the Company and the Additional Guarantors and all things necessary to make this Second Supplemental Indenture a -1- valid, binding and legal instrument according to its terms have been done and performed; NOW THEREFORE, for and in consideration of the premises, the Company, the Additional Guarantors and the Existing Guarantors covenant and agree with the Trustee for the equal and ratable benefit of the respective holders of the Securities as follows: ARTICLE I. ADDITIONAL GUARANTOR 1.1. As of May 1, 1998, and August 28, 1998, respectively, the respective dates of their organization, and in accordance with Sections 4.16 and 10.03 of the Indenture, the following Restricted Subsidiaries (the "Additional Guarantors") hereby severally agree to be subject to and bound by the terms of the Indenture applicable to a Guarantor and hereby jointly and severally unconditionally and irrevocably guarantee on a senior basis the payment of the Securities pursuant to the terms of Article 10 of, and Exhibit B to, the Indenture: Name Jurisdiction of Organization D.R. Horton, Inc. - Portland Delaware Magnolia Homes Builders, Inc. Georgia 1.2 The Additional Guarantors shall execute and deliver a Guarantee, which shall be incorporated herein by reference in the form set forth in Exhibit B to the Indenture. ARTICLE II. MERGED GUARANTORS 2.1 In accordance with Section 10.04 of the Indenture, the Company and the Trustee acknowledge that the Guarantees previously given by the following Merged Guarantors no longer have any force or effect by reason of the merger or dissolution of the Merged Guarantors into the Restricted Subsidiaries as indicated below: (a) DRH New Mexico Construction, Inc. merged into D.R. Horton, Inc. - Albuquerque, as of April 30, 1998, and the name of D.R. Horton, Inc. - Albuquerque was changed to D.R. Horton, Inc. - Louisville. (b) The name of Continental Homes of Austin, L.P., was changed to Continental Homes of Texas, L.P. and Continental Homes of Dallas, L.P. and Continental Homes of San Antonio, L.P. merged into Continental Homes of Texas, L.P. as of July 31, 1998. -2- (c) SGS Communities at West Windsor, LLC dissolved as of July 31, 1998, and its assets were distributed to Meadows IX, Inc. ARTICLE III. MISCELLANEOUS PROVISIONS 3.1 This Second Supplemental Indenture constitutes a supplement to the Indenture, and the Indenture, the First Supplement Indenture thereto, and this Second Supplemental Indenture shall be read together and shall have the effect so far as practicable as though all of the provisions thereof and hereof are contained in one instrument. 3.2 The parties may sign any number of copies of this Second Supplemental Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. 3.3 In the event that any provision in this Second Supplemental Indenture shall be held to be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 3.4 The article and section headings herein are for convenience only and shall not affect the construction hereof. 3.5 Any capitalized term used in this Second Supplemental Indenture and not defined herein that is defined in the Indenture shall have the meaning specified in the Indenture, unless the context shall otherwise require. 3.6 All covenants and agreements in this Second Supplemental Indenture by the Company, the Existing Guarantors and the Additional Guarantors shall bind each of their successors and assigns, whether so expressed or not. All agreements of the Trustee in this Second Supplemental Indenture shall bind its successors and assigns. 3.7 The laws of the State of New York shall govern this Second Supplemental Indenture, the Securities of each Series and the Guarantees. 3.8 Except as amended by this Second Supplemental Indenture, the terms and provisions of the Indenture shall remain in full force and effect. 3.9 This Second Supplemental Indenture may not be used to interpret another indenture, loan or debt agreement of the Company or a Subsidiary. Any such indenture, loan or debt agreement may not be used to interpret this Second Supplemental Indenture. 3.10 All liability described in paragraph 16 of the Notes of any director, officer, employee or stockholder, as such, of the Company or any Guarantor is waived and released. -3- 3.11 The Trustee accepts the modifications of the trust effected by this Second Supplemental Indenture, but only upon the terms and conditions set forth in the Indenture. Without limiting the generality of the foregoing, the Trustee assumes no responsibility for the correctness of the recitals herein contained which shall be taken as the statements of the Company and the Additional Guarantors, and the Trustee shall not be responsible or accountable in any way whatsoever for or with respect to the validity or execution or sufficiency of this Second Supplemental Indenture, and the Trustee makes no representation with respect thereto. IN WITNESS WHEREOF, the parties hereto have caused this Supplemental Indenture to be duly executed, all as of the day and year first above written. D.R. HORTON, INC. By: /s/ David J. Keller --------------------------------- David J. Keller Executive Vice President, Chief Financial Officer and Treasurer ADDITIONAL GUARANTORS: D.R. Horton, Inc. - Portland Magnolia Homes Builders, Inc. By: /s/ David J. Keller --------------------------------- David J. Keller, Treasurer -4- EXISTING GUARANTORS: DRHI, Inc. Meadows I, Ltd. Meadows II, Ltd. Meadows IX, Inc. Meadows X, Inc. D.R. Horton, Inc. - Minnesota D.R. Horton, Inc. - Greensboro D.R. Horton, Inc. - Birmingham D.R. Horton, Inc. - New Jersey D.R. Horton, Inc. - Torrey DRH Construction, Inc. D.R. Horton, Inc. - Louisville D.R. Horton, Inc. - Denver D.R. Horton Denver Management Company, Inc. D.R. Horton San Diego Holding Company, Inc. D.R. Horton San Diego Management Company, Inc. D.R. Horton Los Angeles Holding Company, Inc. D.R. Horton Los Angeles Management Company, Inc. S. G. Torrey Atlanta, Ltd. D.R. Horton, Inc. - Sacramento D.R. Horton Sacramento Management Company, Inc. C. Richard Dobson Builders, Inc. Land Development, Inc. DRH Tucson Construction, Inc. Continental Homes, Inc. KDB Homes, Inc. L&W Investments, Inc. Continental Ranch, Inc. Continental Homes of Florida, Inc. CHI Construction Company CHTEX of Texas, Inc. CH Investments of Texas, Inc. By: /s/ David J. Keller --------------------------------- David J. Keller, Treasurer -5- SGS COMMUNITIES AT GRANDE QUAY, LLC By Meadows IX, Inc., a member By: /s/ Donald R. Horton --------------------------------- Donald R. Horton Chairman of the Board and By Meadows X, Inc., a member By: /s/ Donald R. Horton --------------------------------- Donald R. Horton Chairman of the Board D.R. HORTON MANAGEMENT COMPANY, LTD. D.R. HORTON - TEXAS, LTD. By Meadows I, Ltd., its general partner By: /s/ Donald R. Horton --------------------------------- Donald R. Horton Chairman of the Board CONTINENTAL HOMES OF TEXAS, L.P. By CHTEX of Texas, Inc. Its: General Partner By: /s/ David J. Keller --------------------------------- David J. Keller, Treasurer FIRST UNION NATIONAL BANK, as Trustee By: /s/ George J. Rayzis --------------------------------- Name: George J. Rayzis Title: Vice President -6- EX-10.20 4 EMPLOYMENT AGREEMENT FOR W. THOMAS HICKCOX EXHIBIT 10.20 EMPLOYMENT AGREEMENT AGREEMENT, made as of this 1st day of December, 1997, by and between CONTINENTAL HOMES HOLDING CORP., a Delaware corporation (the "Company"), and W. THOMAS HICKCOX (the "Employee"). W I T N E S S E T H: WHEREAS, the Board of Directors of the Company has approved the employment of the Employee on the terms and conditions set forth in this Agreement; and WHEREAS, the Employee is willing, for the consideration provided, to continue in the employment of the Company on the terms and conditions set forth in this Agreement; NOW, THEREFORE, the parties, intending to be legally bound, agree as follows: 1. Employment. The Company hereby agrees to continue to employ the Employee, and the Employee hereby accepts such continued employment, upon the terms and conditions set forth in this Agreement. 2. Term. The term (the "Term") of the Employee's employment under this Agreement shall be the period commencing on December 1, 1997 and shall continue until November 30, 1999, unless sooner terminated by termination of the Employee's employment pursuant to Section 5, 6 or 7. 3. Position and Duties. During the Term, the Employee shall serve as President, Chief Executive Officer and Chief Operating Officer of the Company, and shall have such responsibilities and authority as commensurate with such office and as may from time to time be prescribed by or pursuant to the Company's By-laws. The Employee shall devote substantially all of his working time and efforts to the business and affairs of the Company. 4. Compensation. During the Term, the Company shall provide the Employee with the following compensation and other benefits: (a) Base Salary. The Company shall pay to the Employee base salary at the initial rate of $300,000 per annum, which shall be payable in accordance with the standard payroll practices of the Company. Such base salary rate shall be reviewed annually in accordance with the Company's normal policies beginning in calendar year 1998; provided, however, that at no time during the Term shall the Employee's base salary be decreased from the rate then in effect except with the written consent of the Employee. (b) Bonus. The Employee shall participate in a bonus program maintained by the Company. (c) Other Benefits. In addition to the compensation and benefits otherwise specified in this Agreement, the Employee (and, if provided for under the applicable plan or program, his spouse) shall be entitled to participate in, and to receive benefits under, the Company's employee benefit plans and programs that are or may be available to senior executives generally and on terms and conditions that are no less favorable than those generally applicable to other senior executives of the Company. At no time during the Term shall the Employee's participation in or benefits received under such plans and programs be decreased except (i) in connection with across-the-board reductions similarly affecting substantially all senior executives of the Company or (ii) with the written consent of the Employee. (d) Expenses. The Employee shall be entitled to prompt reimbursement of all reasonable expenses incurred by him in performing services hereunder, provided he properly accounts therefor in accordance with the Company's policies. 2 (e) Office and Services Furnished. The Company shall furnish the Employee with office space, secretarial assistance and such other facilities and services as shall be suitable to the Employee's position and adequate for the performance of his duties hereunder. 5. Termination of Employment by the Company. (a) Cause. The Company may terminate the Employee's employment for Cause if (i) the Employee willfully engages in conduct which is or would reasonably be expected to be materially and demonstrably injurious to the Company, (ii) the Employee willfully engages in an act or acts of dishonesty resulting in material personal gain to the Employee at the expense of the Company, (iii) the Employee is convicted of a felony, (iv) the Employee engages in an act or acts of gross malfeasance in connection with his employment hereunder, (v) the Employee commits a material breach of the confidentiality provision set forth in Section 10, or (vi) the Employee exhibits demonstrable evidence of alcohol or drug abuse having a substantial adverse effect on his job performance hereunder. The Company shall exercise its right to terminate the Employee's employment for Cause by (i) giving him written notice of termination at least 45 days before the date of such termination specifying in reasonable detail the circumstances constituting such Cause; and (ii) delivering to the Employee a copy of a resolution duly adopted by the affirmative vote of not less than a majority of the entire membership of the Board of Directors (except the Employee), after reasonable notice to the Employee and an opportunity for the Employee and his counsel to be heard before the Board of Directors, finding that the Employee has engaged in the conduct set forth in this subsection (a). In the event of such termination of the Employee's employment for Cause, the Employee shall be entitled to receive (i) his base salary pursuant to Section 4(a) and any other compensation and benefits to the extent actually earned pursuant to this Agreement or any benefit plan or program of the Company as of the date of 3 such termination at the normal time for payment of such salary, compensation or benefits and (ii) any amounts owing under Section 4 (d). Except as provided in Section 9, the Employee shall receive no other compensation or benefits from the Company. (b) Disability. If the Employee incurs a Permanent and Total Disability, as defined below, the Company may terminate the Employee's employment by giving him written notice of termination at least 45 days before the date of such termination. In the event of such termination of the Employee's employment because of Permanent and Total Disability, (i) the Employee shall be entitled to receive his base salary pursuant to Section 4(a) and any other compensation and benefits to the extent actually earned by the Employee pursuant to this Agreement or any benefit plan or program of the Company as of the date of such termination of employment at the normal time for payment of such salary, compensation or benefits, and (ii) any amounts owing under Section 4 (d). For purposes of this Agreement, the Employee shall be considered to have incurred a Permanent and Total Disability if he is unable to engage in any substantial gainful employment by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months. The existence of such Permanent and Total Disability shall be evidenced by such medical certification as the Secretary of the Company shall require and shall be subject to the approval of the Compensation Committee of the Board of Directors of the Company. (c) Without Cause. The Company may terminate the Employee's employment at any time and for any reason, other than for Cause or because of Permanent and Total Disability, by giving him a written notice of termination to that effect at least 45 days before the date of termination. In the event of 4 such termination of the Employee's employment without Cause, the Employee shall be entitled to the benefits described in Section 8. 6. Termination of Employment by the Employee. Good Reason. The Employee may terminate his employment for Good Reason by giving the Company a written notice of termination at least 45 days before the date of such termination specifying in reasonable detail the circumstances constituting such Good Reason. In the event of the Employee's termination of his employment for Good Reason, the Employee shall be entitled to the benefits described in Section 8. For purposes of this Agreement, Good Reason shall mean (i) a significant reduction in the scope of the Employee's authority, functions, duties or responsibilities from that which is contemplated by this Agreement, (ii) the relocation of the Employee's office location to a location more than 50 miles away from the Employee's principal place of employment on December 1, 1997, (iii) any reduction in the Employee's base salary, (iv) a significant change in the Company's annual bonus program adversely affecting the Employee, or (v) a significant reduction in the other employee benefits provided to the Employee (unless the Employee is fully compensated for the value of such reduction through an increase in cash compensation); provided that, in the event of a change of control of the Company involving D.R. Horton, Inc., a substantial reduction in such employee benefits shall not be deemed to have occurred for the purpose of clause (v) above after the expiration of the 6-month period beginning on the date of such change of control if the Employee shall be entitled to participate in and receive benefits under the Company's or its successor's employee benefit plans and programs that are or may be available to senior executives generally and on terms and conditions that are no less favorable than those generally applicable to other senior executives of the Company or its successor. A significant reduction within the meaning of clause (i) of the 5 preceding sentence shall not be deemed to have occurred merely because the Company ceases to be a public company and the Employee ceases to report directly to the Board of Directors or because the Employee's title is changed, provided that the Employee's authority, functions, duties and responsibilities otherwise remain substantially the same as the authority, functions, duties and responsibilities of a person with the Employee's position (as specified in Section 3 herein and as of the date hereof) within a comparably sized division of a national homebuilding company. A significant reduction within the meaning of clause (v) of the second preceding sentence shall not be deemed to have occurred merely by reason of the termination of the Company's Equity Split Dollar Plan, provided that the Company assigns to the Employee all rights which the Company may have under any life insurance policy issued on the Employee's life under said plan, including, without limitation, the right to reimbursement for any premiums and administrative service fees paid by the Company (in which event, subsection (f) of Section 8 of this Agreement shall have no further applicability). If an event constituting a ground for termination of employment for Good Reason occurs, and the Employee fails to give notice of termination within 3 months after the occurrence of such event, the Employee shall be deemed to have waived his right to terminate employment for Good Reason in connection with such event (but not for any other event for which the 3-month period has not expired). (a) Other. The Employee may terminate his employment at any time and for any reason, other than pursuant to subsection (a) above, by giving the Company a written notice of termination to that effect at least 45 days before the date of termination. In the event of the Employee's termination of his employment pursuant to this subsection (b), the Employee shall be entitled to receive (i) his base salary pursuant to Section 4(a) and any other compensation 6 and benefits to the extent actually earned by the Employee pursuant to this Agreement or any benefit plan or program of the Company as of the date of such termination at the normal time for payment of such salary, compensation or benefits, and (ii) any amounts owing under Section 4(d). Except as provided in Section 9, the Employee shall receive no other compensation or benefits from the Company. 7. Termination of Employment By Death. In the event of the death of the Employee during the course of his employment hereunder, the Employee's estate shall be entitled to receive his base salary pursuant to Section 4(a) and any other compensation and benefits to the extent actually earned by the Employee pursuant to this Agreement or any other benefit plan or program of the Company as of the date of such termination at the normal time for payment of such salary, compensation or benefits, and any amounts owing under Section 4(d). 8. Benefits Upon Termination Without Cause or For Good Reason. If the Employee's employment with the Company shall terminate (i) because of termination by the Company pursuant to Section 5(c) other than for Cause or because of Permanent and Total Disability, or (ii) because of termination by the Employee for Good Reason pursuant to Section 6 (a), the Employee shall be entitled to the following: (a) The Company shall pay to the Employee his base salary pursuant to Section 4(a) and any other compensation and benefits to the extent actually earned by the Employee under this Agreement or any benefit plan or program of the Company as of the date of such termination at the normal time for payment of such salary, compensation or benefits. (b) The Company shall pay the Employee any amounts owing under Section 4(d). (c) The Company shall pay to the Employee as a severance benefit an amount equal to three times the sum of (i) his annual rate of base 7 salary immediately preceding his termination of employment, and (ii) the average of his three highest annual bonuses awarded under the Company's regular annual bonus program for any of the five calendar years preceding his termination of employment (or, if he was not eligible for a bonus for at least three calendar years in such five-year period, then the average of such bonuses for all of the calendar years in such five-year period for which he was eligible), with any deferred bonuses counting for the year earned rather than the year paid. Such severance benefit shall be paid in a lump sum within 45 days after the date of such termination of employment. (d) The Company shall pay to the Employee as a bonus for the year of termination of his employment an amount equal to a portion (determined as provided in the next sentence) of the bonus awarded to him under the Company's regular annual bonus program for the calendar year immediately preceding the calendar year of the termination of his employment, with any deferred bonuses counting for the year earned rather than the year paid. Such portion shall be determined by dividing the number of days of the Employee's employment during such calendar year up to his termination of employment by 365 (366 if a leap year). Such payment shall be made in a lump sum within 45 days after the date of such termination of employment, and the Employee shall have no right to any further bonuses under said program. (e) During the period of 36 months beginning on the date of the Employee's termination of employment, the Employee shall remain covered by the medical, dental, vision, life insurance, and, if reasonably commercially available through nationally reputable insurance carriers, long-term disability plans of the Company that covered him immediately prior to his termination of employment as if he had remained in employment for such period. In the event that the Employee's participation in any such plan is barred, the Company shall arrange to provide the Employee with substantially similar benefits (but, in the 8 case of long-term disability benefits, only if reasonably commercially available). Any medical insurance coverage for such 36-month period pursuant to this subsection (e) shall become secondary upon the earlier of (i) the date on which the Employee begins to be covered by comparable medical coverage provided by a new employer, or (ii) the earliest date upon which the Employee becomes eligible for Medicare or a comparable Government insurance program. (f) At the end of the 36-month period described in subsection (e) above, the Company shall assign to the Employee all rights which the Company may have under any life insurance policy issued on the Employee's life under the Company's Equity Split Dollar Plan (including, without limitation, the right to reimbursement for any premiums and administrative service fees paid by the Company). (g) The Company shall arrange for an outplacement assistance firm to provide outplacement assistance services to the Employee at the Company's expense for a period of twelve months beginning on the date of termination of the Employee' s employment. (h) If any payment or benefit received by or in respect of the Employee under this Agreement or any other plan, arrangement or agreement with the Company (determined without regard to any additional payments required under this subsection (h) and Appendix A of this Agreement) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code") (or any similar tax that may hereafter be imposed) or any interest or penalties are incurred by the Employee with respect to such excise tax (such excise tax, together with any such interest and penalties, being hereinafter collectively referred to as the "Excise Tax"), the Company shall pay to the Employee with respect to such Payment at the time specified in Appendix A an additional amount (the "Gross- up Payment") such that the net amount retained by the Employee from the Payment and the Gross-up 9 Payment, after reduction for any Excise Tax upon the Payment and any Federal, state and local income and employment tax and Excise Tax upon the Gross-up Payment, shall be equal to the Payment. The calculation and payment of the Gross-up Payment shall be subject to the provisions of Appendix A. (i) Anything in this Agreement to the contrary notwithstanding, if the Company approves any transaction with another business entity which it wishes to qualify for "pooling of interests" accounting treatment and, prior to the consummation of such transaction, the Company's accountants advise that any benefits payable under this Agreement might adversely affect the availability of such accounting treatment, such benefits shall not be payable, and the Company and the Employee shall negotiate in good faith to provide, if possible, an alternative way of giving substantially equivalent economic benefits to the Employee that would not adversely affect "pooling of interests" accounting treatment. 9. Entitlement To Other Benefits. Except as provided in this Agreement, this Agreement shall not be construed as limiting in any way any rights or benefits that the Employee or his spouse, dependents or beneficiaries may have pursuant to any other plan or program of the Company. 10. Confidential Information. The Employee shall retain in confidence any confidential information known to him concerning the Company, its subsidiaries, and their respective businesses until such information is publicly disclosed. This provision shall survive the termination of the Employee's employment for any reason under this Agreement. 11. No Duty to Seek Employment. The Employee shall not be under any any duty or obligation to seek or accept other employment following termination 10 of employment, and no amount, payment or benefits due to the Employee hereunder shall be reduced or suspended if the Employee accepts subsequent employment. 12. Non-Solicitation. The Employee agrees that, for a period of eighteen months following the date of termination of his employment hereunder, he will not solicit, directly or indirectly, any officer or employee of the Company or any of its subsidiaries or affiliates to leave and work for any other employer and, further, that he will not suggest to others that they approach or solicit any officer or employee of the Company or any of its subsidiaries or affiliates with respect to potential employment elsewhere. This provision shall survive the termination of the Employee's employment for any reason under this Agreement. If the Employee breaches this provision in any significant respect, he shall forfeit his right to receive the payments and benefits described in subsections (c) through (h) of Section 8 (including, without limitation, payments and benefits already received). To the extent any payments and benefits already received are so forfeited, the Employee shall promptly return such payments and benefits to the Company. In addition, the Company may seek other legal and equitable relief in the event of any breach by the Employee of this Section 12. 13. Arbitration. Any dispute or controversy arising under or in connection with this Agreement shall be settled by arbitration, conducted before a panel of three arbitrators in Phoenix, Arizona in accordance with the applicable rules and procedures of the American Arbitration Association then in effect. Arbitration shall be the exclusive remedy for any such dispute or controversy except only as to the failure to abide by an arbitration award rendered hereunder. Judgment upon the award rendered by the arbitrators may be entered in any court having jurisdiction. Such arbitration shall be final and binding on the parties. If the Employee is awarded more than an insignificant amount compared with what the Company asserted was due him or otherwise 11 substantially prevails in the arbitration, the Company shall reimburse the Employee for the costs incurred by the Employee in connection with such arbitration, including without limitation reasonable attorneys' fees, and hereby agrees to pay interest on any money award obtained by the Employee from the date payment should have been made until the date payment is made, calculated at the rate of 2% in excess of the LIBOR rate in effect from time to time from the date that payment(s) to him should have been made under the Agreement. If the Employee enforces the arbitration award in court, the Company shall reimburse the Employee for the costs incurred in such enforcement, including without limitation reasonable attorneys' fees. 14. Successors. This Agreement shall be binding upon and inure to the benefit of the Employee and his estate and the Company and any successor of the Company, but neither this Agreement nor any rights arising hereunder may be assigned or pledged by the Employee. 15. Severability. Any provision in this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective only to the extent of such prohibition or unenforceability without invalidating or affecting the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 16. Notices. All notices required or permitted to be given under this Agreement shall be given in writing and shall be deemed sufficiently given if delivered by hand or mailed by registered mail, return receipt requested, to his residence in the case of the Employee and to its principal executive offices in the case of the Company. Either party may by giving written notice to the other party in accordance with this Section 16 change the address at which it is to receive notices hereunder. 12 17. Controlling Law. This Agreement shall in all respects be governed by and construed in accordance with the laws of the State of Delaware (without giving effect to principles of conflict of laws). 18. Changes to Agreement. This Agreement may not be changed orally but only in a writing, signed by the party against whom enforcement is sought. 19. Counterparts. This Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed an original but all of which together shall constitute one and the same instrument. 20. Entire Agreement. This Agreement constitutes the entire Agreement between the parties with respect to its subject matter and supersedes all prior agreements, drafts, and written or oral representations of either party. IN WITNESS WHEREOF, the parties have executed this Agreement on the ____ day of December, 1997. EMPLOYEE: CONTINENTAL HOMES HOLDING CORP. /s/ W. Thomas Hickcox By:/s/ Timothy C. Westfall - -------------------------- --------------------------------- W. Thomas Hickox ATTEST: By:/s/ Bradley S. Anderson --------------------------------- 13 APPENDIX A GROSS-UP PAYMENTS The following provisions shall be applicable with respect to the Gross-Up Payments described in Section 8(h) of this Agreement. (a) For purposes of determining whether any of the Payments will be subject to the Excise Tax and the amount of such Excise Tax, (i) all of the Payments received or to be received shall be treated as "parachute payments" within the meaning of Section 280G(b)(2) of the Code, and all "excess parachute payments" within the meaning of Section 280G(b)(1) of the Code shall be treated as subject to the Excise Tax unless, in the opinion of tax counsel selected by the Company, the Payments (in whole or in part) do not constitute parachute payments, including by reason of Section 280G(b)(4)(A) of the Code, or excess parachute payments (as determined after application of Section 280G(b)(4)(B) of the Code), and (ii) the value of any non-cash benefits or any deferred payment or benefit shall be determined by independent auditors selected by the Company in accordance with the principles of Sections 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-Up Payment, the Employee shall be deemed to pay Federal income taxes at the highest marginal rate of Federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation to which such payment could be subject based upon the state and locality of the Employee's residence or employment, net of the maximum reduction in Federal income taxes which could be obtained from deduction of such state and local taxes. In addition, for purposes of determining the amount of the Gross-Up Payment, the Company shall make a determination of the amount of any employment taxes required to be paid on the Gross- Up Payment. In the event that the Excise Tax is subsequently determined to be less than the amount taken into account hereunder at the time the Gross-up Payment is made, the Employee shall repay the Company, at the time that the amount of such reduction in Excise Tax is finally determined, the portion of the Gross-up Payment attributable to such reduction (plus the portion of the Gross-up Payment attributable to the Excise Tax and Federal and state and local income and employment tax imposed on the portion of the Gross-up Payment being repaid by the Employee if such repayment results in a reduction in Excise Tax and/or a Federal and state and local income or employment tax deduction), plus interest on the amount of such repayment at the Federal short-term rate as defined in Section 1274 (d)(1)(C)(i) of the Code. In the event that the Excise Tax is determined to exceed the amount taken into account hereunder at the time the Gross-up Payment is made (including by reason of any payments the existence or amount of which cannot be determined at the time of the Gross-up Payment), the Company shall make an additional gross-up payment in respect of such excess (plus any interest, penalties or additions payable with respect to such excess) at the time that the amount of such excess is finally determined. Notwithstanding the foregoing, the Company shall withhold from any payment due to the Employee the amount required by law to be so withheld under Federal, state or local wage or employment tax withholding requirements or otherwise (including without limitation Section 4999 of the Code), and shall pay over to the appropriate government authorities the amount so withheld. (b) The Gross-up Payment with respect to a Payment shall be paid not later than the forty-fifth day following the date of the Payment; provided, however, that if the amount of such Gross-up Payment or portion thereof cannot be finally determined on or before such day, the Company shall pay to the Employee on such date an estimate, as determined in good faith by the Company, of the amount of such payments and shall pay the remainder of such payments (together with interest at the Federal short-term rate provided in Section 1274(d)(1)(C)(i) of the Code) as soon as the amount thereof can be determined. In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to the Employee, payable on the fifth day after demand by the Company (together with interest at the Federal short-term rate provided in Section 1274(d)(1)(C)(i) of the Code). At the time that payments are made under Section 8(h) and this Appendix A, the Company shall provide the Employee with a written statement setting forth the manner in which such payments were calculated and the basis for such calculations, including, without limitation, any opinions or other advice the Company has received from outside counsel, auditors or consultants (and any such opinions or advice which are in writing shall be attached to the statement). 2 EX-21.1 5 SUBSIDIARIES OF D.R. HORTON, INC. EXHIBIT 21.1 SUBSIDIARIES OF D.R. HORTON, INC. As of September 30, 1998 STATE OF INCORPORATION DOING NAME OR ORGANIZATION BUSINESS AS - ----------------------------------- --------------- ------------------- DRHI, Inc. Delaware Meadows I, Ltd. Delaware Meadows II, Ltd. Delaware Meadows IV, Inc. Texas Meadows V, Ltd. Delaware Meadows IX, Inc. New Jersey Meadows X, Inc. New Jersey D.R. Horton Management Company, Ltd. Texas Limited Partnership D.R. Horton - Texas, Ltd. Texas Limited D.R. Horton Custom Partnership Homes DHI Ranch, Ltd. Texas Limited Partnership DRH Construction, Inc. Delaware DRH Land Company, Inc. California DRH Properties, Inc. Arizona DRH Title Company - Southeast, Inc. Delaware DRH Title Company of Colorado, Inc. Colorado DRH Title Company of Florida, Inc. Florida DRH Title Company of Texas, Ltd. Texas Limited Partnership DRH Tucson Construction, Inc. Delaware D.R. Horton, Inc. - Louisville Delaware Mareli Development & Construction D.R. Horton, Inc. - Birmingham Alabama Regency Homes D.R. Horton, Inc. - Denver Delaware Trimark Communities D.R. Horton Denver Management Colorado Company, Inc. D.R. Horton, Inc, - Greensboro Delaware Arappco Homes D.R. Horton, Inc. - Los Angeles Delaware STATE OF INCORPORATION DOING NAME OR ORGANIZATION BUSINESS AS - ----------------------------------- --------------- ------------------- D.R. Horton Los Angeles Holding California D.R. Horton Custom Company, Inc. Homes D.R. Horton Los Angeles Management California Company, Inc. D.R. Horton, Inc. - Minnesota Delaware Joe Miller Homes D.R. Horton, Inc. - New Jersey Delaware SGS Communities D.R. Horton, Inc. - Sacramento California D.R. Horton Custom Homes D.R. Horton Sacramento Management California Company, Inc. D.R. Horton, Inc. - San Diego Delaware D.R. Horton San Diego Holding California D.R. Horton Custom Company, Inc. Homes D.R. Horton San Diego Management California Company, Inc. D.R. Horton, Inc. - Torrey Delaware Torrey Homes Magnolia Homes Builders, Inc. Georgia Magnolia Homes Grand Realty Incorporated New Jersey SGS Communities at Grand Quay, LLC New Jersey SGS Communities SGS Communities at Battleground, LLC New Jersey SGS Communities S. G. Torrey Atlanta, Ltd. Georgia C. Richard Dobson Builders, Inc. Virginia Dobson Builders Land Development, Inc. Virginia D.R. Horton, Inc.-Portland Delaware RMP Properties DRH Title Company-Minnesota, Inc. Delaware Continental Homes, Inc. Delaware KDB Homes, Inc. Delaware Continental Homes L&W Investments, Inc. California Continental Homes Continental Ranch, Inc. Delaware Continental Homes Continental Homes of Florida, Inc. Florida Continental Homes STATE OF INCORPORATION DOING NAME OR ORGANIZATION BUSINESS AS - ----------------------------------- --------------- ------------------- CHI Construction Company Arizona CHTEX of Texas, Inc. Delaware CH Investments of Texas, Inc. Delaware Continental Homes of Texas, L.P. Texas Milburn Homes Continental Homes Surprise Village North, LLC Arizona Continental Traditions, LLC Arizona, LLC CH Mortgage Company Colorado CH Mortgage Company GP, Inc. Delaware CH Mortgage Company LP, Inc. Delaware CH Mortgage Company I, Ltd. Texas Limited Partnership Jefferson Creek, L.L.C. Virginia Limited Liability Company Millstream, L.L.C. Virginia Limited Liability Company Peaceford Meadows, L.L.C. Virginia Limited Liability Company Venture Management, L.L.C. Virginia Limited Liability Company Venture Management of South Carolina Limited South Carolina, L.L.C. Liability Company Summerwalk Associates, L.L.C. South Carolina Limited Liabiity Company Riverside Glen, L.L.C. South Carolina Limited Liability Company Oak Park, L.L.C. South Carolina Limited Liability STATE OF INCORPORATION DOING NAME OR ORGANIZATION BUSINESS AS - ----------------------------------- --------------- ------------------- Vinyard Green, L.L.C. North Carolina Limited Liability Company EX-23.1 6 CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the following registration statements on Forms S-3 and S-4 and related prospectuses and in the following registration statements on Form S-8 of D.R. Horton, Inc., of our report dated November 12, 1998, with respect to the consolidated financial statements of D.R. Horton, Inc. included in this Annual Report (Form 10- K) for the year ended September 30, 1998. Form S-3 Registration No. 333-57193 Form S-4 Registration No. 333-56491 Form S-8 Registration No. 33-48874 Registration No. 33-83162 Registration No. 333-3570 Registration No. 333-3572 Registration No. 333-47767 Registration No. 333-51473 /s/ERNST & YOUNG LLP Fort Worth, Texas December 4, 1998 EX-23.2 7 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS EXHIBIT 23.2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included (or incorporated by reference) in this Form 10-K, into D.R. Horton, Inc's previously filed Registration Statements as follows: Form S-3 Registration No. 333-27521 Registration No. 333-57193 Form S-4 Registration No. 333-56491 Form S-8 Registration No. 33-48874 Registration No. 33-83162 Registration No. 333-3570 Registration No. 333-3572 Registration No. 333-47767 Registration No. 333-51473 /s/ARTHUR ANDERSEN LLP Phoenix, Arizona, December 4, 1998. EX-27 8 FDS FOR 1998 10-K
5 This Schedule Contains Summary Financial Information Extracted From The Consolidated Balance Sheet and Consolidated Statement of Income found on pages 22 and 23 of the Company's Form 10-K for the year ended September 30, 1998 and is qualified in its entirety by reference to such financial statements. 1,000 12-MOS SEP-30-1998 OCT-01-1997 SEP-30-1998 76,754 0 0 0 1,358,033 1,507,112 25,456 0 1,667,835 259,005 826,007 0 0 558 548,878 1,667,835 2,155,049 2,176,941 1,765,610 1,765,610 11,917 0 16,240 159,099 65,719 93,380 0 0 0 93,380 1.75 1.56
EX-99.1 9 CHHC'S SELECTED FINANCIAL STATEMENTS AS OF 5/31/96 EXHIBIT 99.1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Continental Homes Holding Corp.: We have audited the accompanying consolidated statements of income, stockholders' equity and cash flows for the year ended May 31, 1996, of Continental Homes Holding Corp. (a Delaware corporation) and subsidiaries (the Company). These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the result of operations and cash flows of Continental Homes Holding Corp. and subsidiaries for the year ended May 31, 1996, in conformity with generally accepted accounting principles. /s/ARTHUR ANDERSEN LLP Phoenix, Arizona June 19, 1996 -1- CONTINENTAL HOMES HOLDING CORP. CONSOLIDATED STATEMENTS OF INCOME
Year Ended May 31, 1996 --------------------------------- (In thousands, except share data) Revenues: Home sales.................................. $ 577,073 Land/lot sales.............................. 11,844 Mortgage banking and title operations (Note B)................................. 11,481 Other income, net........................... 210 --------- Total revenues........................... 600,608 --------- Costs and Expenses: Homebuilding: Cost of home sales.......................... 469,098 Land/lot sales.............................. 11,907 Selling, general and administrative expenses.................... 62,247 Interest, net (Note A)...................... 5,510 Minority interest (Note A).................. (248) Mortgage Banking and Title Operations: Selling, general and administrative expenses................................... 7,028 Interest, net (Note A)...................... (316) --------- Total costs and expenses................. 555,226 --------- Income before income taxes and extraordinary loss......................... 45,382 Income taxes (Note D)....................... 19,595 --------- Income from operations...................... 25,787 Extraordinary loss: Loss on extinguishment of debt; net of income taxes of $4,807 in 1996 (Note C).. (6,918) --------- Net income.................................. $ 18,869 ========= Earnings per common share (Note A) Income from operations.................... $ 3.71 Net income................................ 2.71 Earnings per common share assuming full dilution (Note A) Income from operations.................... $ 3.00 Net income................................ 2.27 Cash dividends per share.................... $ .20 ========= Weighted average number of shares outstanding................................ 6,959,736 =========
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements. -2- CONTINENTAL HOMES HOLDING CORP. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Year Ended May 31, 1996 -------------------------------------------------------------------- ($ in thousands) Capital in Common Stock Treasury Excess of Retained Shares Amount Stock Par Value Earnings Total --------- ------ -------- ---------- ---------- ---------- Balance, May 31, 1995.................. 7,080,900 $ 71 $ (591) $ 59,610 $ 51,389 $ 110,479 Net income............................. -- -- -- -- 18,869 18,869 Cash dividends......................... -- -- -- -- (1,392) (1,392) Exercise of employee stock options..... -- -- 207 786 -- 993 --------- ----- ------ --------- --------- --------- Balance, May 31, 1996.................. 7,080,900 $ 71 $ (384) $ 60,396 $ 68,866 $ 128,949 ========= ===== ====== ========= ========= =========
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements. -3- CONTINENTAL HOMES HOLDING CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended May 31, 1996 ----------------------- (In thousands) Cash flows from operating activities: Net income............................................... $ 18,869 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization......................... 3,190 Minority interest..................................... (248) Increase in deferred income taxes..................... 95 Tax benefit of employee stock options exercised....... 404 Extraordinary loss on extinguishment of debt.......... 11,725 Decrease (increase) in assets: Homes, lots and improvements in production............ (48,504) Receivables........................................... 8,458 Prepaid expenses and other assets..................... 4,826 Increase in liabilities: Accounts payable and other liabilities................ 11,445 -------- Net cash provided by operating activities................ 10,260 -------- Cash flows from financing activities: Net additions to property and equipment............... (581) Cash paid for acquisitions, net of cash acquired...... (705) -------- Net cash used by investing activities................. (1,286) -------- Cash flows from financing activities: Increase in notes payable to financial institutions............................... (46,424) Retirement of Convertible Subordinated Notes.......... (33,250) Retirement of 12% Senior Notes........................ (107,542) Retirement of bonds payable........................... (17,771) Issuance of Convertible Subordinated Notes............ 83,279 Issuance of 10% Senior Notes.......................... 125,925 Stock options exercised............................... 589 Dividends paid........................................ (1,392) -------- Net cash provided by financing activities............. 3,414 -------- Net increase in cash and cash equivalents................ 12,388 Cash and cash equivalents at beginning of year........... 12,848 -------- Cash and cash equivalents at end of year................. $ 25,236 ======== Supplemental disclosures of cash flow information: Cash paid during the year for: Interest, net of amounts capitalized.................. 7,767 Income taxes.......................................... 16,430
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements. -4- CONTINENTAL HOMES HOLDING CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A. Accounting Policies NATURE OF OPERATIONS The Company designs, constructs and sells high quality single-family homes targeted primarily to entry-level and first-time move-up homebuyers. The Company is geographically diversified, currently operating in Phoenix, Arizona, Austin, San Antonio and Dallas, Texas; Denver, Colorado; South Florida; and Southern California. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and all wholly-owned subsidiaries after elimination of all significant intercompany balances and transactions. INCOME TAXES The Company accounts for income taxes using Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes" ("FAS 109"). See Note D. CONSOLIDATED STATEMENTS OF CASH FLOWS Supplemental schedule of non-cash investing and financing activities: During fiscal 1996, the Company entered into a joint venture whereby the Company contributed cash and the joint venture partners contributed assets (primarily land) valued at $5,045,000. MINORITY INTEREST During fiscal 1996, the Company entered into a joint venture to develop an age restricted community. The Company contributed cash and the joint venture partners contributed assets (primary land). The Company is entitled to 55% of the profits and / or losses and is the managing partner of the joint venture. Due to the control that the Company exercises, it has consolidated the financial position and results of operation of the joint venture. The partners' equity position is disclosed as a minority interest on the consolidated balance sheet. PROPERTY AND EQUIPMENT Property and equipment is stated at cost and consists primarily of office furniture and equipment. Depreciation expense is provided using the straight-line method over the estimated useful lives (three to five years). Depreciation expense was $773,000 in 1996. The costs of maintenance and repairs are charged to expense as incurred. -5- EXCESS OF COST OVER RELATED NET ASSETS ACQUIRED The excess of costs over related net assets acquired is being amortized over periods ranging from three to twenty years using the straight-line method. Amortization expense was $1,401,000 in 1996. USE OF ESTIMATES The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of revenues and expenses during the reported periods. Actual results could differ from those estimates. STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS During the fourth quarter of 1996, the Company elected to adopt early Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long- Lived Assets to Be Disposed of" ("FAS 121") retroactive to June 1, 1995. The adoption of FAS 121 did not impact the Company's results of operations or financial positions and did not result in a restatement of any of the financial results for the prior three quarters of fiscal 1996. Under FAS 121 real estate assets are to be reviewed for possible impairment whenever events or circumstances indicate the carrying amount of an asset may not be recoverable. If indications are that the carrying amount of the assets may not be recoverable, FAS 121 requires an estimate of the future undiscounted cash flows expected to result from the use of the asset and its eventual disposition. If these cash flows are less than the carrying amount of the asset, an impairment loss must be recognized to write down the asset to its estimated fair value less costs to sell. The fair value calculation under FAS 121 would result in a lower valuation of the asset than under the net realizable value method previously required. Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" ("FAS 123"), issued in October 1995, establishes financial accounting and reporting standards for stock-based employee compensation plans. FAS 123 requires either the recognition of compensation cost in the financial statements for those companies that adopt the new fair value based method or expanded disclosure of pro forma net income and earnings per share information for those companies that retain the current method set forth in APB Opinion 25, "Accounting for Stock Issued to Employees." FAS 123 will be effective for the Company's fiscal year ending May 31, 1997. The Company plans to retain the current method set forth in APB Opinion 25 and will present the expanded disclosure in the fiscal 1997 financial statements. SALES RECOGNITION The Company recognizes income from home and land sales in accordance with Statement of Financial Accounting Standards No. 66. The Company includes the discounts incurred in obtaining permanent financing for its customers in cost of home sales. -6- MORTGAGE BANKING FEE RECOGNITION Loan origination fees are recognized as income in accordance with Statements of Financial Accounting Standards Nos. 65 and 91. INTEREST, NET The summary of the components of interest, net are as follows:
Year Ended May 31, 1996 ----------------------- (In thousands) Interest expense, homebuilding......................... $ 5,982 Interest income, homebuilding.......................... (472) ------- $ 5,510 ======= Interest expense, mortgage banking..................... $ 1,785 Interest income, mortgage banking...................... (2,101) ------- $ (316) =======
In addition to the amounts above, the Company expensed interest as a component of cost of homes sales of $16,233,000 in fiscal 1996. EARNINGS PER COMMON SHARE Earnings per common share has been computed using the weighted average number of common shares outstanding during the period. Earnings per common share assuming full dilution has been computed assuming the conversion of the Convertible Subordinated Notes due November 2002. B. Consolidated Mortgage Subsidiaries The Company's consolidated financial statements of income include its wholly-owned mortgage banking and finance subsidiaries. Financial data of the mortgage banking and finance subsidiaries is summarized as follows:
Year Ended May 31, 1996 ----------------------- (In thousands) Total revenues.......................................... $ 9,948 Net interest income..................................... 316 Net income.............................................. 2,596
C. Extinguishment of Debt In November 1995, the Company issued $86,250,000 principal amount of 6-7/8% Convertible Subordinated Notes due November 1, 2002. The net proceeds were used to redeem the Company's 6-7/8% Convertible Subordinated Notes due March 2002 and to reduce temporarily outstanding amounts under certain of the -7- Company's revolving lines of credit (including the warehouse line of credit). In connection with the redemption of the notes, the Company recorded an extraordinary loss, net of taxes, of approximately $859,000 due to the writeoff of unamortized discount and debt issuance costs. D. Income Taxes The Company will file a consolidated Federal income tax return which will include all subsidiaries. Components of current and deferred income taxes follow:
Current Deferred Total ------- -------- ------- (In thousands) Year Ended May 31, 1996 Federal....................................... $ 17,484 $ 81 $ 17,565 State and other............................... 2,016 14 2,030 ------- ----- ------- $ 19,500 $ 95 $ 19,595 ======= ===== =======
The effective income tax rate differs from the Federal statutory tax rate for the following reasons:
Year Ended May 31, 1996 ----------------------- U.S. statutory tax rate................................. 35% State income taxes, net of Federal tax benefit.......... 6 Amortization and other, net............................. 2 -- 43% ==
E. Stock Options The Company has two stock incentive plans (the "Plans"). The 1988 Stock Incentive Plan was approved by the Board of Directors on July 29, 1988 and the stockholders on August 26, 1998 and amended by the Board of Directors on July 23, 1992 and the stockholders on August 26, 1992. The 1986 Stock Incentive Plan was approved by the Board of Directors and the stockholders of the Company on July 26, 1986. The Plans are intended to provide an incentive to officers and key employees of the Company and its subsidiaries to remain with the Company. The Board of Directors has authorized the reservation of 700,000 shares of the Company's common stock for issuance under the Plans. Options may be granted at a price equal to the market value on the date of the grant (or 85% of market value in the case of non-qualified options) and may not be exercised for one year (six month in the case of non-qualified options) from the date of the grant. Under the Plans, options must be exercised within 10 years (5 years for a 10% holder) from the date the options were granted. -8- The following summarizes the stock option transactions for the year ended May 31, 1996:
Number of Shares Option Price --------- ---------------- Outstanding at May 31, 1995.............. 244,635 $ 4.00 - $21.375 Granted............................... 35,000 $18.25 Canceled.............................. (8,000) $12.50 - $21.375 Exercised............................. (67,865) $ 4.00 - $21.375 ------- Outstanding at May 31, 1996.............. 203,770 $ 6.50 - $21.375 ======= Exercisable at May 31, 1996.............. 101,095 $ 6.50 - $21.375 =======
At May 31, 1996, there were 162,995 shares reserved for future grants. F. Contingencies In management's opinion, the Company is not involved in any legal proceedings which will have a material effect on the Company's financial position or operating results. -9- -----END PRIVACY-ENHANCED MESSAGE-----